Bitcoin Mania: The Birth of a Worldwide Virtual Currency Or the Start of an Insane Bubble? 9781552705018, 9781552705001, 9781552705025

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Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

A Masterpiece in Cynicism About What’s Wrong With Fiat Currencies, the Commercial Banks and their Overlords This is a delightfully cynical book which takes a caustic look at the paper fiat currencies which we use everyday and dares to question how long they can survive. Could worthless paper be replaced by an ingenious worldwide digital cryptocurrency called “Bitcoin”, which has arrived on the scene relatively recently and which threatens to overturn the tables of traditional fiat money changers? In response, the commercial banksters, whose very existence is founded on fiat currencies, have cold-shouldered this virtual currency upstart. Meanwhile, impotent regulators struggle to contain it before it spreads like an unstoppable antibody-resistant virus which could evolve into a worldwide pandemic. Written under a pseudonym by a former financial analyst with a wickedly nasty sense of humour, he questions the foundations for whole financial system of the developed world based on fiat paper currencies and asks (quite innocently...of course) if there is a better alterative in the form of a worldwide digital cryptocurrency or could that be the start of an insane bubble? The author hopes that at the very least you will find his book entertaining. In reading it, you may be moved to uncontrollable laughter, fits of rage or a cool abandonment to the follies of dysfunctional governments; the death twitches of impotent regulators or the conniving efforts of banksters’ lobbyists. He dearly hopes that he may also provide you with a glimmer of a new world which is free of the shackles of increasingly worthless paper-based currencies. He guarantees that the read will be challenging and thoughtprovoking. Enjoy!

ISBN: 978-1-55270-501-8 Written by: Learn2succeed.com Incorporated Published in Canada by: Productive Publications, P.O. Box 7200 Station A, Toronto, ON. M5W 1X8 Phone: (416) 483-0634 Fax: (416) 322-7434 Canadian Web Site: www.ProductivePublications.ca American Web Site: www.ProductivePublications.com Front Cover Art: Spider web adapted from copyright free clip art from Corel Gallery 200,000 Corel Corporation, 1600 Carling Ave. Ottawa Bitcoin logo courtesy of Bitcoin wike, maintained by the Bitcoin community

Copyright © 2015 by Learn2succeed.com Incorporated

Library and Archives Canada Cataloguing in Publication

Bitcoin mania : the birth of a worldwide virtual currency or the start of an insane bubble? / by Learn2succeed.com, Incorporated. Issued in print and electronic formats. ISBN 978-1-55270-500-1 (pbk.).--ISBN 978-1-55270-501-8 (pdf).-ISBN 978-1-55270-502-5 (epub) 1. Electronic funds transfers. I. Learn2succeed.com Inc, author

All rights reserved. No part of this publication may be reproduced, stored in retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without written permission of the author.

Disclaimer

This book mentions the names of a number of publicly traded companies as well as private businesses. These are provided only by way of example and are not a solicitation to make investments in them; purchase or sell such securities or to purchase the products they offer. Readers should consult a qualified financial advisor before making any investment or purchase decisions. No representation is made with respect to the accuracy or completeness of the contents of this book and both the author and the publisher specifically disclaim any implied warranties of merchantability or fitness for any particular purpose and in no event shall either be liable for any loss of profit or any other commercial damage; including but not limited to special, incidental, consequential or other damages. For full disclosure, neither the author nor the incorporated company which acts as a pseudonym for the author, held or possessed any Bitcoins at the time of writing and publication of this book.

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CONTENTS

INTRODUCTION Could This Be the Birth of a W orldwide Virtual Cryptocurrency?. . . . . . . . . . . . . . . . . . . . . . . . 1

Chapter 1 Welcome to Bitcoinland! Then They Tell You That Your Salary is Going to Be Paid in Bitcoins!. . . . . . . . . . . . . . . . . . . . 5 OK! So, You are Resigned to Being Paid in Bitcoins ...Question is: W here Do You Spend Them?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Bitcoins are Not Yet Universally Accepted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Credit Cards are Under Serious Attack by Hackers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Credit Cards are Also Under Attack from Merchants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Cash is King (Up to a Point!) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 The Big Advantages Bitcoins Have as a Medium of Exchange. . . . . . . . . . . . . . . . . . . . . . . . . . 11 BitPay: An Online Payment Processor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 You Just Bought an Online Game Through Zynga Using Bitcoins!.. . . . . . . . . . . . . . . . . . . . . . 13 Other Merchants W ho Accept Bitcoins. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Bitcoin Search Engine. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 You Could Buy a House with Bitcoins!. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Pay for Your Restaurant Meal with Bitcoins!. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 A Junior Canadian Mining Company Pays its Bills with Bitcoins!. . . . . . . . . . . . . . . . . . . . . . . 15

Chapter 2 Your Bankster's Eyes Light Up When You Do Business Overseas: The Cost of International Money Transfers Origins of the Euro. . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Exorbitant Cost of International Money Transfers. Transfering Money in Bitcoins.. . . . . . . . . . . . . . . . . . . BitPesa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 3 Bitcoins Muscle Their Way into the Digital Gift Card Business The Gift Card Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gyft. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Growing Acceptance of Bitcoin Gift Cards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . How Gyft W orks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gift Card Registries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W rapp.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CardAvenue .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19 20 21 24 24 25 25

Chapter 4 Let's Go Gambling in Cyberspace! Online Gambling with Bitcoins!.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Peer-to-Peer Betting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Chapter 5 Where The Bad Guys Bought Their Guns, Narcotics and Counterfeit Money Could Silk Road Be Made into a Hollywood Blockbuster Movie?. . . . . . . . . . . . . . . . . . . . . . . Design of the Silk Road W ebsite and the Tor Network. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Illegal Goods and Services Sold on the Silk Road W eb Site. . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments Made in Bitcoins But W ith a Twist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W here W ere the Users Located?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . How Much W as this Guy Making?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dread Pirate Roberts (DPR) Accused of Attempting to Enlist the Services of a Hitman. . . . . . . Other Silk Road Employees Arrested.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Armory Section on Silk Road. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money Laundering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The 2014 Canadian Federal Budget Addresses the Bitcoin Issue. . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 6 Could You Hold Bitcoins as an Investment? W ho Are the Largest Holders of Bitcoins?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Do the Number Crunching!. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Red Flags are W aving!. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W ild Price Swings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Is There a Better W ay to Play the Bitcoin Investment Game?. . . . . . . . . . . . . . . . . . . . . . . . . . .

48 49 50 50 51

Chapter 7 The Birth of Bitcoin W ho Created Bitcoin?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bitcoins 101, Thanks to an FBI Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Example of a Blockchain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Challenge of Handling the Nerdy Details. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Hash Algorithm SHA-256.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An Explanation of the Mining Algorithm.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mining Hardware and Software. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Block Reward. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Solo Mining vs. Mining on Mining Pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Your Digital W allet: W here You Stash Your Digital Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bitcoin Addresses.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W hat Happens W hen a Transaction Takes Place?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Can You Reverse a Transaction?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bitcoin Protocol: W atch Your “B”s and “b”s!. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Division of Bitcoins. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Physical Bitcoins. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

52 52 54 56 56 56 57 58 59 60 61 61 62 62 63 64

Chapter 8 Bitcoin Exchanges: How to Get Your Hands on this Digital Cryptocurrency The Challenge of Convertibility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bitcoin Automated Teller Machines (ATMs).. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Coinsetter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Take Care!. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Chapter 9 In Bitcoins We Trust...or Do We? How Safe are Bitcoins?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Internet Outages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distributed Denial of Service (DDoS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Guard Against Digital Pickpockets!. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Double Spending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finney Attack. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Race Attack. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transaction Malleability.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Greater Than 51% Attack. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Attacks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

70 70 72 72 73 73 74 74 75 75

Chapter 10 Don't Be Fooled...The Tax Hounds Are Watching For Evidence of Your Bitcoin Transactions! Could Bitcoinland Develop into a Digital Tax Haven?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bitcoin’s Status in Taxland is still to be Defined. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Similarity Between Bitcoins and Fiat Paper Currencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A Difference Between Bitcoins and Fiat Paper Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Anonymity of Bitcoins and Fiat Paper Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Tax Treatment of Bitcoin Mining and the “Equipment” Used. . . . . . . . . . . . . . . . . . . . . . . How the Taxman Deals with Bitcoin Exchanges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One Thing is For Sure!. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

76 77 78 79 80 80 81 83

Chapter 11 The Big Picture: Gold, Fiat Currencies and Bitcoins A Comparison Between Bitcoins and Gold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gold as a "Store" of Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W hen Gold Coins were First Used as Money.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debasement of Gold Coinage.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Obama Adminstration's Debasement of Coinage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Introduction of Banknotes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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The Gold Standards. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Bretton W oods. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 The Globalization of W orld Banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 The Near Collapse of the W orld Banking System. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Fractional Reserve Banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 Bitcoins Cannot Play a Role in the Magician’s Game of Fractional Reserve Banking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 Bitcoin Mortgages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 Changes to the Regulatory Environment W hich W ill Affect Bank Financing. . . . . . . . . . . . . . . 93 The Repeal of the Glass-Steagall Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 Dodd Frank Bill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94 The Volker Rule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Increasing Scrutiny in the UK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 Canadian Banks Relatively Unscathed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 The Basel Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 Now that Big Banks Have Been Brought to Heel, Does it Mean You Can Get a Loan More Easily?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 The Banking Function. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 W hat is a Fiat Currency?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 Floating Exchange Rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 The Concept of a Reserve Currency.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 A Futile Call for the Return of the Gold Standard. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99 The Advent of a Two-Tier Gold Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 The Devaluation of the U.S. Dollar. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 The Legalisation of Private Individual Gold Holdings.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 A Comparison Between Bitcoins and Gold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 A Comparison Between Bitcoins and Fiat Currencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 If Central Banksters are Short of Money: W hat do they Do?. . . . . . . . . . . . . . . . . . . . . . . . . . . 102

Chapter 12 The Public's Widespread Distrust of Banksters Banksters are Almost Universally Disliked. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Banksters in Cyprus Seize Depositors’ Money. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Events in Cyprus Poured a Cold Chill Over Bank Depositors in the PIIGS of Europe.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Banksters’ Scandals Go On.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bitcoin Rises on a Lack of Trust in Banksters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W hy Bitcoin Gives Central Banksters the Heebie-Jeebies. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Helicopter Ben, Janet Yellen and Tsar Putin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 The U.S. Fiat Money Printing Press. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 Bitcoins Could Keep Governments Respectable!.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108

Chapter 13 Bitcoins as a Worldwide Virtual Cryptocurrency Could Bitcoin be an Antidote for Inflation?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Could Bitcoin be an Antidote for Currency Devaluations?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 Could Bitcoin Develop into a Universal W orld Cryptocurrency?. . . . . . . . . . . . . . . . . . . . . . . 112

Chapter 14 Will the Good Guys With Guns Quell the Rebellion Against Fiat Currencies? God Bless the Regulators! Can the Good Guys Quell the Upstart Rebellion in Bitcoinland?. . . . . . . . . . . . . . . . . . . . . . . Don’t W orry! The American Lobbyocracy will Leap into Action. . . . . . . . . . . . . . . . . . . . . . . Could the Possession of Bitcoins be Made Illegal?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reality Check! Can the Good Guys with Guns Force the Bitcoin Genie Back into Its Bottle?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Chinese Found a W ay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Central Banksters Perceive Bitcoins as a Threat to Their Fiat Currencies. . . . . . . . . . . . . . . . . National Security Poses the Biggest Threat to Cryptocurrencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Could a “Green List” for Bitcoin Validation be the Answer?. . . . . . . . . . . . . . . . . . . . . . . . . . The Tentacles of U.S. Regulators Extend Far Beyond their Borders. . . . . . . . . . . . . . . . . . . . . Compliance under the U.S. Financial Crimes Enforcement Network (FinCEN). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Dutch Thumb Their Noses at Bitcoin Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . An Ominous Sign: Apple Removes Bitcoin Apps. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

114 115 116 116 117 120 120 121 122 123 124 125

Chapter 15 Greenspan's Latest Epiphany: A Bitcoin “Bubble” Bubbles are Driven by Greed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 Precious Metal Bubbles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 Greenspan’s Bitcoin “Bubble”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

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Contents

Chapter 16 Other Cryptocurrencies: Bitcoins Aren't the Only Game in Town Bitcoins Aren’t the Only Cryptocurrency.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Namecoin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Litecoin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Feathercoin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Peercoin or PPCoin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Primecoin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mastercoin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Clinkle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ripple. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Give-Me-COINS: a Virtual Currency Mining Pool. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Early Adopters Have an Advantage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

129 129 130 130 131 131 132 133 133 134 134

Chapter 17 The Future for Off-Planet Banking Are Bitcoins a Virtual Currency?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Are Bitcoins a Virtual Commodity?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Are Bitcoins W orks of Art?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W ill Bitcoins Evolve Into a Payment System?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disintermediation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Could the Possession of Bitcoins be Declared Illegal?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W ill Bitcoinlanders Be Forced to Reveal Their True Identities?. . . . . . . . . . . . . . . . . . . . . . . . W ill Bitcoinlanders be Digitally Strip-Searched for Activities that are Deemed Illegal?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Could the Dark W allet Provide a Solution?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Rise of Gold and the Collapse of Fiat Currencies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Could a Universal Cryptocurrency Replace the W orld’s Fiat Currencies Over the Course of the Next Century?. . . . . . . . . . . . . . . . . . . . . . . . . . . . Could a W orld Virtual Cryptocurrency Based on Gold Be Emerging?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Problem with a Cryptocurrency Based on Gold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Could a New W orld Digital Cryptocurrency Emerge that is Not Based on a Commodity Such as Gold?.. . . . . . . . . . . . . . . . . . . . . . . . . . . Back to the Beginning of Our Story. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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135 137 139 139 140 140 140 141 142 142 146 147 148 149 149

INTRODUCTION

Could This Be the Birth of a Worldwide Virtual Cryptocurrency?

In November 2013, British billionaire, Sir Richard Branson, announced that Virgin Galactic would accept payment in bitcoins for booking a space flight so you can become an astronaut for a brief period of time. Alternatively, you could pay $250,000 in conventional U.S. dollars. Meanwhile, back on earth; in February 2013, Domino’s Pizza announced that it would start accepting payment in bitcoins. You can now purchase other restaurant meals and a whole host of services and merchandise using bitcoins. They are especially useful for making online purchases; for gift certificates; for peer-to-peer betting or online gambling. You can now purchase bitcoins at Bitcoin exchanges and they are gaining traction even though they are not yet recognized as legal tender. The value of a bitcoin rose almost ninety-fold during 2013, but it wasn’t a straight ride. It fell dramatically in early October in response to the FBI’s bust of Silk Road which was accused of selling narcotics and firearms in return for payment in bitcoins. However, bitcoins proved resilient and the price climbed back up. By November 2013, the value of a bitcoin hit $1,250 USD only to be clobbered once more when China closed down the bitcoin exchanges in that country. The bitcoin market shrugged off this rude

1

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

Communist intrusion into freewheeling unbridled capitalism and, by early January 2014, the price of a bitcoin was back above $1,000 again. “OK...so what are bitcoins?” Bitcoins are a cryptocurrency created in 2008 by a group of programmers who operated under the name Satoshi Nakamoto. OK, you say: “but what’s a cryptocurrency?” A cryptocurrency is a peer-to-peer digital currency; the creation of which is based on cryptography, which makes it difficult to counterfeit. It also permits any transactions to be validated, so that some crypto magician can’t just pull them out of a hat. “Yea! So what’s cryptography?” Well, in simplistic terms, it is a method of secret writing which uses code or ciphers. It owes its origin to the Greek “kryptos” meaning “hidden.” What’s interesting is that over 3,000 years ago, the ancient Egyptians were using hieroglyphics to encrypt secret messages. In more recent times, Hitler used it to communicate with his top generals and it was only the genius of a small team at England’s Bletchley Park that were able to decrypt the messages; thereby shortening the war by several years, although their efforts went largely unrecognized and unrewarded. You can store bitcoins in a digital wallet on your desktop or laptop. You can even get an Android app which let you incorporate a Bitcoin Wallet in your smartphone.

2

Introduction: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

Bitcoins are developing into a global virtual currency and provide any easy and inexpensive way to make worldwide money transfers. Of course this treads on the toes of the almighty commercial banksters and threatens to overturn their tables as money changers. As a consequence, they have coldshouldered bitcoins and would dearly love to have central banksters do their dirty work and crucify the perpetrators. Of course, this puts government servants and central banksters in a quandary. Suddenly, they are plunged into the midst of a populist uprising which worships a new world cryptocurrency and they find themselves impotent to do what regulators are supposed to do....that is: regulate! Does this mean that the world’s slaves to paper fiat currencies can throw off their shackles and embrace a democratic digital currency which can fearlessly transcend international borders and let them purchase anything in the bitcoin universe or simply keep their bitcoins stashed in their digital wallets, in a hope that they grow in value? Not so fast! Enter former Fed. Chairman Alan Greenspan who famously warned of “irrational exuberance” in the stock market and correctly predicted the dot-com bubble. Unfortunately, he didn’t have the same insight into the lead up to the U.S. sub-prime mortgage bubble which was growing at an alarming rate during his watch. In his latest epiphany, the retired Chairman has declared that bitcoins are a “bubble.” Is he right? There’s certainly a Bitcoin Mania but is it a “bubble?” This is one of the questions I will examine in this book together with other insights into the concept of this cryptocurrency: how it is created, how to obtain it, how to spend it and how to save it. I’ll also cover what might happen under heavyhanded regulators and taxmen. It’s an exhilarating and fast-moving story. 3

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

Fasten your digital seatbelts, pay your fare in bitcoins; become an astronaut; read this book and enjoy your flight to “Bitcoinland.”

4

Chapter 1 Welcome to Bitcoinland!

You undo your digital seat belt and push your gut back into place. The doors open and you step out into the bright sunshine of Bitcoinland. There to greet you are some of the local Bitcoinlanders. For the most part they are nerds in their early twenties, with shaven bald heads (both male and female) and they have Coke bottle glasses (correction- that should read Pepsi–I hope they’ll pay more!) In unison, they wave their hands in the air and chant “Welcome to Bitcoinland! Welcome to your new job in the land of unregulated virtual currency!”

Then They Tell You That Your Salary is Going to Be Paid in Bitcoins! You’ve just settled in to your new computer desk and your new boss says: “We’re going to pay you in bitcoins. So, here’s one bitcoin to pay your wages for next week.” You say (in your mind...after all he’s your boss): “Is this guy some crack pot? It’s time I flew back and looked for another job.” Then, some bald-headed nerd from across the room shouts: “The price of a Bitcoin has just gone up fifty bucks!”

5

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

Reality sets in. You say to yourself: “What would I have done if he had paid me in dollars. I’d have entrusted my money to my local bankster back home and deposited it into my savings account which pays a paltry 0.0000005% annual interest if I have over $100,000 on deposit!” (Well...something like that!) On the other hand, what would you do if the bald-headed nerd announces in a funeral director’s monotone “The price of a bitcoin has just gone down fifty bucks!” “That’s it....I quit right now! That paltry 0.0000005% annual interest sounds pretty good to me! I’ll tell my boss to go stick his bitcoin in a place where the sun don’t shine!” So, is this far fetched? Well, actually it isn’t! In December 2013, the Chief of Police in Vicco, Kentucky, agreed to have his salary paid in bitcoins and other city employees may soon follow. In May 3012, David Meyer of Gigaom reported that a Finnish company, SC5, which is developing HTML5, is offering to pay part of its workers’ wages in bitcoins.

OK! So, You are Resigned to Being Paid in Bitcoins ...Question is: Where Do You Spend Them? “OK, OK! These Bitcoinlanders are really getting to me” you say to yourself. “I’ll wander down the street to the convenience store and buy myself a nice cool can of pop.” (Relax! It’s not Coke! No! It’s not Pepsi!) 6

Chapter 1 Welcome to Bitcoinland!

“Do you take bitcoins?” you ask the guy at the checkout. He looks at you as if you just got off a space ship: “What’s zat?” He asks, with his hands cupped behind his ears and straining forward to hear you better. “Never mind!” you say with resignation. “Here’s a five dollar bill” “Zat’s better!” he exclaims. “We love zat paper stuff round ‘ere. Problem is...just can’t lay me hands on enough of it!”

Bitcoins are Not Yet Universally Accepted Alright, I am being a tad facetious, but bitcoins face a serious challenge. They are not universally accepted as a medium of exchange and until they are, they will remain on the peripheral of everyday commerce. The challenge for bitcoins is that, just like the guy in the convenience store, the average person on the street has never heard of them and if they have, they don’t know what they are worth. Just for fun, try it out on your friends or ask the checkout clerk the next time you go into a store. Having said that, they are gaining traction, and fairly fast.

Credit Cards are Under Serious Attack by Hackers Merchants who accept credit cards have to deal with fraud and identity theft like never before.

7

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

Indeed, at the time of writing, Target hit the headlines when it finally admitted to the theft of 70 million credit card and debit card numbers together with customer information. I’ve heard that the information is being sold in the underworld at about $100 per record. It’s open house for identity theft on a massive scale; credit card fraud by the truckload. It also exposes debit card holders to having their bank savings cleaned out. In retribution, Target is likely to face massive law suits and class actions undertaken by its customers. The alarming fact is that Target hasn’t been the only chain subject to a cyber security attack. Neiman Mercus announced in January 2014 that it had been the victim of an attack. The same month, the FBI revealed that it had uncovered 20 more Point of Sale (POS) terminal attacks during the previous year and issued a confidential 3-page warning to retailers of the risks posed by “memory parsing” malware that can infect cash registers and credit card swiping machines. Indeed, several months ago, I received a letter from the software company, Adobe, that records had been stolen. It was a couple of years since I had done business with them online. Informing me that I should be on the alert for unauthorized payments was not enough, in my view. I immediately phoned American Express (whose card I had used) and had them cancel my card and issue a new one with a different number. On January 16, 2014, iSIGHT Partners issued the following statement on its Web site: “Working with the U.S. Secret Service, [iSIGHT Partners] has determined that a new piece of malicious software, KAPTOXA (Kar-Toe-Sha), has potentially infected a large number of retail information

8

Chapter 1 Welcome to Bitcoinland!

systems. A joint publication has been issued by the Department of Homeland Security, USSS, FS-ISAC and iSIGHT Partners.” The statement goes on to caution retailers with POS terminals that they may be at risk and that if they believe that they have been compromised, to immediately contact their local U.S. Secret Service (USSS) Field Office/Electronic Crimes Task Force (ECTF). The statement tries to reassure consumers and tells them not to be worried but to be vigilant and check bank statements for fraudulent charges; monitor credit statements for unusual activity and not to open email from unknown or suspicious sources. What all this says is that hundreds of millions Americans may be robbed of their money, so just lay back and enjoy it..and oh, yes, let the Secret Service know about it after it’s gone! Actually, aside from the malware in the POS terminals, there was probably a cyber attack deep inside Target’s database. Let’s face it, a POS terminal is only going to record the amount of the transaction, the card number, expiry date and the pin number. It’s not going to reveal the customers name, e-mail address, physical address, age, gender and other marketing information accumulated on the customer. Consumer confidence in the use of credit cards has been undermined on a massive scale and this opens up a possible return to cash as a method of payment. It also opens the door, a little, for bitcoins to be accepted as a secure payment method; in spite of the fact that they have also had a few cream pies thrown in their face. 9

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

Credit Cards are Also Under Attack from Merchants When a merchant accepts payment by credit card, they have to pay the credit card issuer (VISA, MasterCard, American Express, Discover etc.) a fee which is usually in the range of 2% to 3%. Originally, these fees were hidden from the customer and absorbed by the merchant...but no more. Backed by on the outcome of court cases and an out-of-court settlement in 2013, U.S. merchants have been able to pass these “swipe” fees on to the consumer by way of an extra charge, however, at the time of writing, it was not apparent that many American retailers were willing to impose surcharges on credit card users; even though they are legally entitled to do so. Believe me, I can tell you from my $USD and $CAD merchant accounts, the fees per transaction are not the only fees merchants have to pay. There are terminal rental fees and annual fees. Plus, they have to deal with chargebacks, which fortunately I have not yet encountered. As a consequence, while my own business still accepts credit cards, I’ve been finding that many other merchants are starting to refuse payment by credit card and are insisting on debit cards or cash. Meanwhile, payment in bitcoins offers a tantalizing alternative.

Cash is King (Up to a Point!) There is no doubt that cash is king when it comes to paying merchants or service providers but it does present some problems.

10

Chapter 1 Welcome to Bitcoinland!

The first is when large sums are involved. If you have to lug around huge bags stuffed with cash to make payments; banksters acting as agents for the money laundering police are likely to shine a spotlight on you. Secondly, you have to keep the cash in a safe place or some crafty robber will sniff it out and beat you over the head. Thirdly, counterfeit cash presents a problem. In 2012, North Korea was reportedly cranking out pretty good fakes of $50 and $100 U.S. bills by using the government’s own money printing presses. The U.S. Secret Service referred to them as “superdollars” which where were hard to differentiate from the real thing. These were in contrast to cheap imitations emerging from criminal mom and pop counterfeit operations using computer printers and high end graphic software. They were also in contrast to the somewhat more passable bills printed by mafia bosses and drug lords using high-end offset printers.

The Big Advantages Bitcoins Have as a Medium of Exchange Counterfeiting is not a problem because the blockchain and the private key guard against that. Theft of bitcoins, while not impossible, is infinitely more difficult to accomplish than the theft of cash. Since bitcoins involve anonymous peer-to-peer transactions, money launderers are less likely to come under the spotlight of authorities and of

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Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

course, this is a major concern to law enforcement agencies. For that reason, I’ll delve into money laundering in more detail later in this book.

BitPay: An Online Payment Processor BitPay acts as a Bitcoin electronic payment processor for over 15,000 businesses and charities. It enables online merchants to accept bitcoins, as a form of payment, just as they accept payments from Visa, Mastercard, or PayPal. It boasts that it can accept payments from anywhere in the universe! It is available in every country, and you can set your prices in over 150 different currencies. Merchants in some countries can choose to receive a direct deposit into their bank account on a daily basis. Payments in bitcoins are sent to the bitcoin address of your choice, at least once per calendar day. This prevents balances from accumulating and discourages hackers. Also, unlike credit card transactions, there are no chargebacks and supposedly fraud levels are exceptionally low. BitPay states that it prefers to send one payment to every merchant each day, which clears out their balance with BitPay.

12

Chapter 1 Welcome to Bitcoinland!

You Just Bought an Online Game Through Zynga Using Bitcoins! On January 6, 2014, Zynga, located in San Francisco, announced that, on a trial basis, it would accept payment in bitcoins for seven different virtual games These include CastleVille, FarmVille 2 and Hidden Shadows. . BitPay in Atlanta, GA is acting as its payment processor for Zynga and this places it in direct competition with other online payment gateways such as PayPal.

Other Merchants Who Accept Bitcoins According to www.spendbitcoins.com there are over 1,600 items that can be purchased using Bitcoins. The list includes consultants, sellers of sheepskin accessories for toddlers, yoga mats, bookstores, etc. Spendbitcoins.com features an interesting list and naturally many merchants have something to do with the bitcoin business, quite a lot of technology, a few lawyers and the inevitable sprinkle of porn. However, as the Web site warns, listings are by site owners and none of the names have been vetted so...caveat emptor! It is interesting that neither Amazon nor eBay were accepting bitcoins as payment at the time of writing.

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Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

Bitcoin Search Engine Go to www.Bitcoinsearchengine.com to find merchants who accept bitcoins. It provides an interesting list. It is searchable by product and by country but it relies on voluntary submissions and for that reason, I strongly suspect that it may only show a fraction of the Bitcoin universe and I must admit that I was disappointed. At the time of writing, the search engine featured only 51 merchants in the United States who were accepting bitcoins. Canada had 6 and the U.K. had 8. By far the vast majority of countries had zero. That’s not surprising for places like Afghanistan, North Korea, Egypt and Iran but it is surprising for Japan which boasts the world’s third-largest economy and Brazil as the powerhouse of South America.

You Could Buy a House with Bitcoins! In December 2013, The National Post reported that a Red Deer, Alberta, homeowner had placed a $1 million property up for sale and offered to accept payment in Bitcoins. Evidently, the idea was to attract potential Chinese buyers where trading in Bitcoins had taken off prior to the Chinese government clampdown on exchanges. There was no mention whether the real estate lawyer would accept payment in Bitcoins for his services!

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Chapter 1 Welcome to Bitcoinland!

Pay for Your Restaurant Meal with Bitcoins! In the Introduction, I mentioned that Domino’s Pizza is accepting bitcoins as payment. There are others such as Burger King, Fisherman's Wharf, Papa Johns Pizza, The Crab House and Upper Crust Pizza. Is this a start of a trend? Instead of pulling your American Express or VISA card out of your wallet, you may be able to pay using the bitcoin wallet in your smartphone.

A Junior Canadian Mining Company Pays its Bills with Bitcoins! In October 2013, Alix Resources, a junior mining company based in Vancouver, B.C., announced that it would be paying for exploration work on its Windy property in bitcoins. It’s an innovative idea but it certainly has not helped the share price of the penny stock which has slumped from about 4 cents at the time of the announcement to a miserable 2 cents at the time of writing!

15

Chapter 2 Your Bankster's Eyes Light Up When You Do Business Overseas: The Cost of International Money Transfers

Origins of the Euro Please forgive me, but it is a long time since I heard about this and my numbers may seem a little fuzzy. In pre-Euro times, if you took £1,000 pounds sterling and travelled through nine major countries in Europe; changing your money into local currency at each stop, you would arrive back in the U.K. with a little over £360; all the rest having been eaten up by the banksters’ money exchange charges. So, the good news is that the creation of the Euro quashed this monetary rape and the banksters had to find some other way to make money...like raising service and other fees!

The Exorbitant Cost of International Money Transfers Unfortunately, for folks in the U.S. and Canada, not much has changed. Your bankster's eyes light up when you have to convert money to do business overseas or even between Canada and the U.S. Indeed, money changing allows them to suck the financial blood out of their customers with impunity. I seem to recollect that someone else got upset with this and overturned the money changers' tables, but that was in a house of worship. He got crucified! 16

Chapter 2: Your Bankster's Eyes Light Up When You Do Business Overseas: The Cost of International Money Transfers

Transfering Money in Bitcoins Transferring money in bitcoins is something that should really make the commercial banks upset. For many years, they have wallowed in the fees they generate by perpetuating built-in inefficiencies in their money transfer process. As an Amazon.com merchant, I ran into this head-on early in 2013. In order to transfer $USD funds my business had generated through sales on Amazon.com to the company's $USD Canadian bank account, I was forced to consider ACH transfers which would cost about $50 per month (i.e., $600 a year) plus the service charges per transaction, plus the bank charges to maintain an account at a participating financial institution. My requests to Amazon to simply issue a paper cheque have all gone unheaded which makes me wonder aloud if this is an attempt to keep Canadian publishers out of the U.S. bookmarket. Of course, money could always be transferred by wire but again bank fees can be anywhere from $10 to $20 per transaction. This is impractical if the transfer is for amounts of $100 or less. Then you could purchase a money order. The last time I checked, the bank fees were just under $10 a pop (which can be a high percentage for small transactions) but then you also get skinned on the foreign exchange rates (if you are purchasing in a foreign currency) which usually amount to another 2%.

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Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

You can approach Western Union which has carved out a business by making money transfers. Once again, you are looking at fees which can be a high percentage of the amounts transferred; especially if they are small. For many immigrants, the money transfer fees for sending money to family members in their home country, can add up to a big expense over the years.

BitPesa People sending money back to relatives in Kenya will be offered an elegant answer in the form of BitPesa which is due to be rolled out sometime in 2014. "Pesa" means money in the main local language, Swahili. Interestingly, many of the intended recipients live in remote areas and do not have land line telephone service but a huge number of them have smartphones with Internet access by means of a wireless network called WiMAX. Voila! With BitPesa they should be able to transfer bitcoins to their smartphone digital wallets of their relatives using it as a very low cost intermediary! And...the locals don't even have to have a bank account. They could pay for goods and services using their digital wallets. Oh! Are the commercial banks, Western Union and MoneyGram going to cry their hearts out? I hope so! They've had it too good for too long!

18

Chapter 3 Bitcoins Muscle Their Way into the Digital Gift Card Business

The Gift Card Business I must admit that I had no concept of how large the gift card business was until I started researching for this book. I discovered that $29 billion a year is spent on plastic gift cards which are a convenient and quick way to purchase a gift for someone; especially when you don’t know them well enough to go out and purchase something specific that they would really appreciate. Up until a few years ago, gift cards were predominately plastic. That’s all fine and dandy if you only have one or two, but if you have a lot of friends or relatives who love to shower you with presents but haven’t a clue as to what you would like, you could end up with a wallet brimming full of plastic cards. If you don’t keep them with all the other plastic in your wallet, you could end up misplacing or losing them or even worse, forgetting about them altogether. There is one way to solve this irritant and that is to digitize those gift cards and store them on a mobile device such as your smartphone.

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Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

Gyft Gyft is an app that enables you to redeem, send, manage and buy gift cards using your mobile device or your computer. Gyft will manage your gift cards on one safe and secure platform. It uses Digicert and Verisign for all transactions so you don’t have to worry about a stolen or lost plastic gift card. If you are purchasing a gift card, Gyft permits you to pay with any major credit or debit card or by using bitcoins. If you are a recipient of a gift, Gyft lets you upload all your plastic gift cards which removes the hassle of carrying them in your wallet. It also stores your gift card information securely with passcode protection. Your cards are also automatically backed up on the cloud so you can access your account from any browser. You can then redeem your card in a bricks and mortar store or online from your smartphone. Gyft will then enter and update balances as you redeem your gift cards and automatically check remaining balances on cards for select retailers. Gyft gained prominence late in 2013 when Victoria Secret Stores announced

that it would use the app to let its customers buy gifts using the cryptocurrency.

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Chapter 3 Bitcoins Muscle Their Way into the Digital Gift Card Business

A Growing Acceptance of Bitcoin Gift Cards You can choose from over 300 other retailers and restaurants which include some well-known names, which I am sure you will immediately recognize: 1-800 Flowers 1-800 Pet Supplies Adidas Amazon.com Allposters.com Alamo Drafthouse Aeropostale Aerie American Eagle Applebee's Aquarium Restaurant Art.com Athleta Babies R Us Brinker Restaurants Brenner's Steakhouse Boomerang Grill Big Fish Seafood Belk BedandBreakfast.com Bath & Body Works Babin's Seafood Banana Republic Barewalls.com

Barnes & Noble Bass Pro Shops Brookstone Bubba Gump Shrimp Build a Bear Burger King Cabela's CB2 Casual Male XL Captian D's Callaway Cadallic Bar Columbia Sportswear Claim Jumper Chili's CHEFS Chart House Charley's Crab Charleston's Restaurant Charity Choice Champs Sports Celebrity Cruises Crate & Barrel Crutchfield 21

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

CVS D'Angelo Destination XL Facebook Fandango Finale Fish Tales Fisherman's Wharf Foot Locker Fragrancenet.com FTD Game Stop Gap Golfsmith Great American Days Grotto Groupon Hal Smith Restaurants Harlow's Food & Fun Hefner Grill Hot Topic Hyatt JCPenney Jelly Belly Kemah Boardwalk kmart La Griglia Lady Foot Locker Land of Nod

Laundry's Seafood Land's End Louie's Grill & Bar Logan's Roadhouse Lobster Gram Lighthouse Buffet Levy Restaurant Legal Sea Foods Lucilles BBQ Magazines.com Mahogany Steakhouse Mama Roja Kitchen Mariott Maui Jim Muer Seafood My Tech Card Nascar.com NFLShop.com Nike Not Your Average Joes Nutrisystem Old Navy Omaha Steaks Overstock.com Papa Gino's Papa Johns Pizza Peohe's Pesce Piperlime 22

Chapter 3 Bitcoins Muscle Their Way into the Digital Gift Card Business

Pro Am Golf Rainforest Cafe Red Door Spas Red Robin Red Sushi Redrock Canyon Regal Cinemas Restaurants Unlimited Restaurants Unlimited Rixty Rochester Big & Tall Saltgrass Steak House Staples Sports Authority Spa Finder Spa Week Simms Steakhouse Shutterfly Sephora Sears Steak n' Shake Stein Mart

T-Rex Toby Keith's Restaurant Timberland The Ocenaire The Flying Dutchman The Crab House The Children's Place T.G.I. Fridays Torrid Tower of America Toys R Us Uno Chicago Grill Upper Crust Pizza Vic & Anthonys VIP Auto Parts Wayspa.com Willie G's Wine Enthusiast Wine.com Yak & Yeti Zales Zappos Zeevex

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Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

How Gyft Works When you’ve selected the merchant, you can send cards directly to your friends for important events via Facebook, e-mail, or text. In the event that you have a card that you don’t need you can safely and securely “re-gift” it from your Gyft wallet. You can also send a video message with your gift card and receive Facebook friends’ birthday notifications. You will also receive notifications when someone receives and opens your card. Gyft was established in 2012 and has its headquarters in San Francisco, California. The startup said that more than $10 million and 200,000 plastic gift cards have been uploaded to Gyft in the previous year, and a new gift card is added every two minutes.

Gift Card Registries Gyft rolled out a Gift Card Registry that allows consumers to personalize their registries for special events such as weddings, birthdays, holidays and baby showers. This allows users to create a “wish list” of the gift cards they want to receive. This registry can then be shared via a link printed on invitations, posted on Web sites, or on social networks like Twitter or Facebook. This is an enormous market with estimated expenditure of $10 billion in 2011 according to a study by TheKnot.com and WeddingChannel.com.This $10 billion does not include gifts purchased outside of the registry.

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Chapter 3 Bitcoins Muscle Their Way into the Digital Gift Card Business

Gyft iPhone app is currently available for download at the iTunes App Store. The Android app can be downloaded at Google Play.

Wrapp Wrap, originally from Sweden, is a direct competitor to Gyft. Wrap announced a $15 million funding round in the summer of 2013. I phoned their California branch to ask if they accepted bitcoins but did not receive a reply.

CardAvenue CardAvenue is another mobile gift card registry, however, when I phoned them in early January 2014, they indicated that did not accept bitcoins.

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Chapter 4 Let’s Go Gambling in Cyberspace!

Online Gambling with Bitcoins! Online gambling has certainly attracted members of the bitcoin community. For example, SatoshiDice accepts Bitcoins in its gaming operations. If you want to learn more, visit: www.satochidice.com. Incidentally, SatoshiDice was sold in July 2013 for 126,315 Bitcoins, equivalent at that time, to $11.5 million USD. If you are interested, check out BitBet Online Casino (www.bitbet.com) where you can play up to thirty games including the slots, Blackjack, roulette and video poker. The only payment method is using bitcoins. These aren’t the only players in this space. In March 2013, a company with the somewhat similar name of SatoshiCircle began operating inToronto and in June of the same year JustDice (www.just-dice.com) opened up. Early in 2014, Google’s Android operating system introduced its Mobile Casino app for smartphones. Because online casinos don’t have to cover the enormous overhead, staffing and security costs of traditional bricks-and-mortar casinos, they can afford to operate with a lower house edge which increases your odds. Also, you no 26

Chapter 4 Let's Go Gambling in Cyberspace!

longer have to fly to Las Vegas, Atlantic City or Macou and endure endless line-ups at airport security checks. Instead, you can just sit at your computer or use your smartphone to gamble during your morning coffee break! Or, in the evenings, you could become a casino gambling couch potato! All of this makes me wonder aloud if the glitzy world of brick-and-mortar casinos is coming to an end and with that, kills off all the jobs that they create. Well, not necessarily, because Las Vegas is fighting back. From October 2013, you could work through Bitmarkers (www.bitmarkers.com) and use your stash of bitcoins to fly there, book hotels and obtain credit to gamble.

Peer-to-Peer Betting Want to bet with a friend as to which team will win the 2014 World Soccer Cup in Brazil? Make the bet with your friend in bitcoins! Don’t know of any friends willing to make the bet? Well, for a while a company called InTrade could facilitate bets in what became known as a “prediction market” but this was shut down in March 2013 due to “financing irregularities.”

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Could Silk Road Be Made into a Hollywood Blockbuster Movie? Forget about The Social Network based on Mark Zuckerberg’s rise to fame as Facebook’s creator. Want to watch something really fascinating, fast moving and delightfully murky, then you may want to wait until Hollywood gets around to producing a movie on Silk Road. Meanwhile you’ll have to settle for a gripping account written by an FBI agent in seeking an arrest warrant in the court for The Southern District of New York. The warrant was for Silk Road’s creator, Ross William Ulbricht, who operates under the pseudonym “Dread Pirate Roberts” or “DPR” for short. Ulbricht is the 29-year old who created Silk Road. His credentials show that he was a physics student at the University of Texas and that between 2006 and 2010, he attended the University of Pennsylvania where he studied material science and engineering. Ulbricht attracted the attention of the FBI in July 2013 after a routine border search by U.S. Customs and Border Protection intercepted an inbound package from Canada, which contained nine counterfeit identity documents featuring different names but with the same photo; namely that of Ulbricht. This led the FBI to an address on 15th Street in San Francisco where Ulbricht 28

Chapter 5 Where The Bad Guys Bought Their Guns, Narcotics and Counterfeit Money

resided. This, in turn, resulted in an undercover investigation which exposed Silk Road’s secret operations in acting as intermediary for the sale of narcotics, counterfeit money and documents. On September 27, 2013, Ulbricht was indited. He was subsequently arrested by FBI agents at a San Francisco Library on October 1, 2013. It was reported that the arrest was made without incident. He was charged with conspiracy of trafficking in narcotics and the possession of controlled substances i.e., heroin, cocaine, LSD and metamepetamine. He was also charged with money laundering and a computer hacking conspiracy. The 33-page FBI inditement makes such a good read and explains the complex operations of Silk Road in such clear terms that I decided to provide you with some titillating extracts, written by the FBI agent in charge of the case.

Design of the Silk Road Website and the Tor Network 18. In the course of this investigation, I have gained extensive familiarity with the Silk Road website through various means, including undercover activity on the website by myself and other law enforcement agents, as well as forensic analysis of computer servers used to operate the Silk Road website that have been located and imaged during the investigation. Based on my familiarity with the Silk Road website, I know the following about the site's design:

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a. The Silk Road website provides a sales platform that allows vendors and buyers who are users of the site to conduct transactions online. The basic user interface resembles those of well-known online marketplaces. b. However, unlike mainstream e-commerce web sites, Silk Road is only accessible on the Tor network. Based on my training and experience, I know the following about Tor: i. Tor is a special network of computers on the Internet, distributed around the world, that is designed to conceal the true IP addresses of the computers on the network, and, thereby, the identities of the network's users. ii. Although Tor has known legitimate uses, it also is known to be used by cybercriminals seeking to anonymize their online activity. iii. Every communication sent through Tor is bounced through numerous relays within the network, and wrapped in numerous layers of encryption, such that it is practically impossible to trace the communication back to its true originating IP address. iv. Tor likewise enables web sites to operate on the network in a way that conceals the true IP addresses of the computer servers hosting the web sites. Such "hidden services"operating on Tor have complex web addresses, generated by a address for the Silk Road website is currently"sil kroadvbSpiz3r.onion ."

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v. Websites with such ".onion" addresses can be accessed only using Tor browser software. However, such software can be easily downloaded for free on the Internet. The FBI agent adds a footnote to clarify the meaning of an IP address. Every computer device on the Internet has an Internet protocol or "IP" address assigned to it, which is used to route Internet traffic to or from the device. A device's IP address can be used to determine its physical location and, thereby, its user. c. In order to access the Silk Road website, a user need only download Tor browser software onto his computer, and then type in Silk Road's ".onion" address into the user's Tor browser. Silk Road's ".onion" address can be found in various online forums and other websites on the ordinary Internet. d. Upon being directed to the Silk Road website, a user is presented with a black screen containing a prompt for a user name and password, as well as a link that says "click hereto join." No further explanation about the site is given. Based on my training and experience, such cryptic login screens are often used by criminal websites in order to restrict access to users who already know about the illegal activity on the site(typically through word of mouth on Internet forums) and deliberately seek to enter. e. Upon clicking the link on the Silk Road login screen to join the site, the user is prompted to create a username and password, and to identify the country where he is located. No other information is requested, and the 31

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

country location information entered by the user is not subject to any type of verification. f. After entering a username and password, the user is then directed to Silk Road's homepage, a sample printout of which, printed on September 23, 2013, is attached hereto as Exhibit A. [Publisher’s note–image is omitted in this book] g. At the top left corner of the homepage is a logo for the site, labeled "Silk Road anonymous market." h. On the left side of the screen is a list titled"Shop by Category," which contains links to the various categories of items for sale on the site. i. In the center of the screen is a collection of photographs reflecting a sample of the current listings on the site. j. At the top of the screen is a link labeled"messages," which the user can click on to access Silk Road's"private message" system. This system allows users to send messages to one another through the site, similar to e-mails. k. At the bottom right of the screen is a link labeled "community forums," which leads to an online forum where Silk Road users can post messages to "discussion threads"concerning various topics related to the site (the "Silk Roadforum").

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l. Also at the bottom right of the screen is a link labeled "wiki," which leads to a collection of "frequently asked questions" and other forms of guidance for site users (the "SilkRoad wiki"). m. The bottom right of the screen also contains a third link labeled "customer service," which leads to a customer support page where users can "open a support ticket" and contact an "administrator," who, the page says, "will take care of you personally." n. Clicking on any of the links to items for sale on the site brings up a webpage containing the details of the listing, including a description of the item, the price of the item, the username of the vendor selling it, and "reviews" of the vendor's "product" posted by previous customers. An example of such a listing is attached hereto as Exhibit B. [Publisher’s note: not shown in this book.] o. To buy an item listed, the user can simply click the link in the listing labeled "add to cart." The user is then prompted to supply a shipping address and to confirm the placement of the order. p. Once the order is placed, it is processed through Silk Road's Bitcoin-based payment system, described further below. [Publisher’s note: this topic will be covered later in this book.]

Illegal Goods and Services Sold on the Silk Road Web Site Once again, the FBI agent provides a very lucid account of what was offered by Silk Road. 33

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

19. Based on my familiarity with the Silk Road website, I know the following about the illegal nature of the goods and services sold on the site: a. The illegal nature of the items sold on Silk Road is readily apparent to any user browsing through its offerings. The vast majority of the goods for sale consist of illegal drugs of nearly every variety, which are openly advertised on the site as such and are immediately and prominently visible on the site's home page. b. As of September 23, 2013, there were nearly 13,000 listings for controlled substances on the website, listed under the categories "Cannabis," "Dissociatives," "Ecstasy," "Intoxicants," "Opioids," "Precursors," "Prescription," "Psychedelics," and "Stimulants," among others. Clicking on the link for a particular listing brings up a picture and description of the drugs being offered for sale, such as "HIGH QUALITY #4 HEROIN ALL ROCK" or "5gr UNCUT Crystal Cocaine!!" c. The narcotics sold on the site tend to be sold in individual-use quantities, although some vendors sell in bulk. The offerings for sale on the site at any single time amount to multi-kilogram quantities of heroin, cocaine, and methamphetamine, as well as distribution quantities of other controlled substances, such as LSD. d. In addition to illegal narcotics, other illicit goods and services are openly sold on Silk Road as well. For example, as of September 23, 2013: i. There were 159 listings on the site under the category "Services." Most concerned computer-hacking services; for e xample, one listing 34

Chapter 5 Where The Bad Guys Bought Their Guns, Narcotics and Counterfeit Money

was by a vendor offering to hack into Facebook, Twitter, and other social networking accounts of the customer's choosing, so that "You can Read, Write, Upload, Delete, View All Personal Info"; another listing offered tutorials on "22 different methods" for hacking ATM machines. Other listings offered services that were likewise criminal in nature. For example, one listing was for a "HUGE Blackmarket Contact List," described as a list of "connects" for "services" such as " A n o n y m o u s B a n k A c c o u n t s , " " C o u n t e r f e i t B il l s (CAD/GBP/EUR/USD)," "Firearms + Ammunition," "Stolen Info (CC [credit card], Paypal}," and "Hitmen {10+ countries} ." ii. There were 801 listings under the category "Digital goods," including offerings for pirated media content, hacked accounts at various online services such as Amazon and Netflix, and more malicious software. For example, one listing, titled "HUGE Hacking Pack **150+ HACKING TOOLS & PROGRAMS**," described the item being sold as a "hacking pack loaded with key loggers, RATS, banking trojans, and other various malware. The FBI agent adds a footnote to clarify the meaning of a “Keylogger.” A "keylogger" is a type of malicious software designed to monitor the keystrokes input into an infected computer and to transmit this data back to the hacker. A "RAT," or "remote of access tool," is a type of malicious software designed to allow a hacker to remotely access and control an infected computer. A "banking Trojan” is a type of malicious software designed to steal an infected user's bank-account login credentials.

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Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

iii. There were 169 listings under the category "Forgeries," placed by vendors offering to produce fake driver's licenses, passports, Social Security cards, utility bills, credit card statements, car insurance records, and other forms of identity documents. e. Not only are the goods and services offered on Silk Road overwhelmingly illegal on their face, but the illicit nature of the commerce conducted through the website is candidly recognized in the Silk Road wiki and the Silk Road forum. For example: i. The Silk Road wiki contains a "Seller's Guide" and "Buyer's Guide" containing extensive guidance for users on how to conduct transactions on the site without being caught by law enforcement. The "Seller's Guide," for instance, instructs vendors to "vacuum seal" packages containing narcotics, in order to avoid detection by "canine or electronic sniffers." Meanwhile, the "Buyer's Guide" instructs buyers to "[u]se a different address" from the user's own address to receive shipment of any item ordered through the site, "such as a friend's house or P.O. box," from which the user can then "transport [the item] discreetly to its final destination." ii. The Silk Road forum likewise contains extensive guidance on how to evade law enforcement, posted by users of the site themselves. For example, in a section of the forum labeled "Security - Tor, Bitcoin, cryptography, anonymity, security, etc.," there are numerous postings by users offering advice to other users on how they should configure their computers so as to avoid leaving any trace on their systems of their activity on Silk Road.

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20. Since November of 2011, law enforcement agents participating in this investigation have made over 100 individual undercover purchases of controlled substances from Silk Road vendors, including purchases made from, and substances shipped to, the Southern District of New York. The substances purchased in these undercover transactions have been various Schedule I and II drugs, including ecstasy, cocaine, heroin, LSD, and others. Samples of these purchases have been laboratory-tested and have typically shown high purity levels of the drug the item was advertised to be on Silk Road. Based on the postal markings on the packages in which the drugs arrived, these purchases appear to have been filled by vendors located in over ten different countries, including the United States. Agents have also made undercover purchases of hacking services on Silk Road, including purchases of malicious software such as password stealers and remote access tools.

Payments Made in Bitcoins But With a Twist Payment can be made anonymously by using bitcoins, however, Silk Road added an extra twist to further protect its buyers and sellers, as described in the FBI document. Silk Road uses a so-called "tumbler" to process Bitcoin transactions in a manner designed to frustrate the tracking of individual transactions through the Blockchain. According to the Silk Road wiki, Silk Road's tumbler "sends all payments through a complex, semi-random series of dummy transactions, making it nearly impossible to link your payment with any coins leaving the site." In other words, if a buyer makes a payment on Silk Road, the tumbler obscures any link between the buyer's Bitcoin address and the vendor's 37

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

Bitcoin address where the Bitcoins end up - making it fruitless to use the Blockchain to follow the money trail involved in the transaction, even if the buyer's and vendor's Bitcoin addresses are both known. Based on my training and experience, the only function served by such "tumblers" is to assist with the laundering of criminal proceeds.

Where Were the Users Located? According to the inditement, as of July 23, 2013, there were 957,079 user accounts on the servers they seized. Of those, 30% were located in the United States and the rest were in the UK, Australia, Germany, Canada, Sweden, France, Russia, Italy and the Netherlands. Slightly over a quarter of the accounts were located in unnamed jurisdictions.

How Much Was this Guy Making? Silk Road was charging a commission of 8% to 15% on each transaction. Lower cost items would bear a higher commission; whereas higher priced items were subject to a lower percentage commission. The FBI estimated that about 1.2 million transactions had taken place between February 6, 2011 and July 23, 2013. This produced about $1.2 billion in revenue based on 614,305 bitcoins. This in turn produced commissions of $79.8 million; some of which was paid out to administrative staff...in bitcoins.

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As of July 23, 2013, Silk Road’s “bank” account contained 29,600 bitcoins, with an estimated value at that time of $3.4 million. So far as I know, the FBI is still the proud custodian of this stash.

Dread Pirate Roberts (DPR) Accused of Attempting to Enlist the Services of a Hitman This may be an aside to the story of Bitcoin, but I couldn’t resist including a little attempted murder/mystery involving one of its major promoters! The FBI inditement provides all the lurid details. For example, DPR's private message communications from March and April 2013 reveal at least one occasion when DPR solicited a murder-for-hire of a certain Silk Road user, who was attempting to extort money from DPR at the time, based on a threat to release the identities of thousands of Silk Road users. Specifically, the messages reveal the following: a. Beginning on March 13, 2013, a Silk Road vendor known as "FriendlyChemist" began sending threats to DPR through Silk Road's private message system. In these messages, FriendlyChemist stated that he had a long list of real names and addresses of Silk Road vendors and customers that he had obtained from hacking into the computer of another, larger Silk Road vendor. FriendlyChemist threatened to publish the information on the Internet unless DPR gave him $500,000, which FriendlyChemist indicated he needed to payoff his narcotics suppliers.

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Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

b. In one message to DPR dated March 14, 2013, FriendlyChemist elaborated on the consequences for Silk Road if he followed through on this threat; “what do u. . think will happen if thousands of usernames, ordr amounts, addresses get leaked? all those people will leave sr [Silk Road] and be scared to use it again. those vendors will all be busted and all there customers will be exposed too and never go back to sr.” c. On March 15, 2013, FriendlyChemist provided DPR a sample of the usernames, addresses, and order information he intended to leak. Also, as proof that he had obtained the data from the vendor whose computer he claimed to have hacked, FriendlyChemist supplied the vendor's username and password on Silk Road so that DPR could verify it. d. On March 20, 2013, DPR wrote to FriendlyChemist stating: "Have your suppliers contact me here so I can work something out with them." e. On March 25, 2013, a Silk Road user named "redandwhite" contacted DPR, stating: "I was asked to contact you. We are the people friendlychemist owes money to. What did you want to talk to us about?" f. On March 26, 2013, DPR wrote to redandwhite, stating, "Just to be clear, I do not owe him any money. l'm not entirely sure what the best action to take is, but I wanted to be in communication with you to see if we can come to a conclusion that works for everyone. FriendlyChemist aside, we should talk about how we can do business. Obviously you have access to illicit substances in quantity, and are having issues with bad

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Chapter 5 Where The Bad Guys Bought Their Guns, Narcotics and Counterfeit Money

distributors. If you don't already sell here on Silk Road, I'd like you to consider becoming a vendor." g. Later on March 26, 2013, redandwhite responded: "If you can get FriendlyChemist to meet up with us, or pay us his debt then I 'm sure I would be able to get people in our group to give this online side of the business a try." h. On March 27, 2013, DPR wrote back: "In my eyes, FriendlyChemist is a liability and I wouldn't mind if he was executed. I'm not sure how much you already know about the guy, but I have the following info and am waiting on getting his address." DPR provided a name for FriendlyChemist and stated that he lived in White Rock, British Columbia, Canada, with "Wife + 3 kids." DPR added: "Let me know if it would be helpful to have his full address." i. Meanwhile, after not hearing anything back from DPR since March 20, 2013, FriendlyChemist sent a message to DPR on March 29, 2013, stating: "u leave me no choice I want 500k usd withn 72hrs or I am going to post all the info I have. I hate to do this but I need the money or im going to release it all. Over 5000 user details and about 2 dozen vender identities. wats it going to be?" j. Several hours later on March 29, 2013, DPR sent a message to "redandwhite," stating that "FriendlyChemist" is "causing me problems," and adding: "I would like to put a bounty on his head if it's not too much trouble for you. What would be an adequate amount to motivate you to find him? Necessities position."

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Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

k. After redandwhite asked DPR what sort of problem FriendlyChemist was causing him, DPR responded, in a message dated March 30, 2013: "[H]e is threatening to expose the identities of thousands of my clients that he was able to acquire.... [T]his kind of behavior is unforgivable to me . Especially here on Silk Road, anonymity is sacrosanct." As to the murder-for-hire job he was soliciting, DPR commented that "[i]t doesn't have to be clean." 1. Later that same day, redandwhite sent DPR a message quoting him a price of $150,000 to $300,000 "depending on how you want it done" "clean" or "non-clean." m. On March 31, 2013, DPR responded: "Don't want to be a pain here, but the price seems high. Not long ago, I had a clean hit done for $80k. Are the prices you quoted the best you can do? I would like this done asap as he is talking about releasing the info on Monday." n. Through further messages exchanged on March 31, 2013, DPR and redandwhite agreed upon a price of 1,670 Bitcoins - approximately $150,000 - for the job. In DPR's message confirming the deal, DPR included a transaction record reflecting the transfer of 1,670 Bitcoins to a certain Bitcoin address. o. Several hours later on March 31, 2013, redandwhite wrote back: "I received the payment. We know where he is. He'll be grabbed tonight. I'll update you."

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p. Approximately 24 hours later, redandwhite updated DPR, stating: "Your problem has been taken care of. Rest easy though, because he won't be blackmailing anyone again. Ever." q. Subsequent messages reflect that, at DPR's request, redandwhite sent DPR a picture of the victim after the job was done, with random numbers written on a piece of paper next to the victim that DPR had supplied. On April 5, 2013, DPR wrote redandwhite: "I've received the picture and deleted it. Thank you again for your swift action." 32. Although I believe the foregoing exchange demonstrates DPR's intention to solicit a murder-for-hire, I have spoken with Canadian law enforcement authorities, who have no record of there being any Canadian resident with the name DPR passed to redandwhite as the target of the solicited murder-for-hire. Nor do they have any record of a homicide occurring in White Rock, British Columbia on or about March 31, 2013.

Other Silk Road Employees Arrested While the FBI documents go to great lengths to show that Dread Pirate Roberts was in charge of everything, he did have several helpers. In December 2013, The Southern District Court of New York indited three more people for participating in Silk Road’s conspiracy to traffic in narcotics. Andrew Michael Jones was arrested in Virginia and Peter Phillip Nash was arrested in Brisbane by Australian Federal Police. Gary Davis was not arrested and appeared to be on the run in Ireland. 43

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The Armory Section on Silk Road The Armory Section on Silk Road was closed in December 2012 and up till that time could accept bitcoins as payment. This closure was done voluntarily and apparently because many of Silk Road’s vendors were uneasy about the operations in light of the U.S. school shootings. Having said this, The Armoury (not associated with Silk Road) still exists as an online gun shop which has not been shut down for illegal activities at the time of writing, so they really should not be listed in this chapter under “bad guys.” Don’t forget “the only thing that stops a bad guy with a gun is a good guy with a gun” according to an executive with the National Rifle Association (NRA)! If you visit their website www.the-armory.com you’ll find a vast selection of revolvers, shotguns, rifles, an assortment of semi-automatics and loads of ammo. To the best of my knowledge, they do not accept bitcoins as payment.

Money Laundering The FBI also alleged that Dread Pirate Roberts was engaged in a money laundering conspiracy “in part to conceal and disguise the nature, the location, the ownership, and the control of the proceeds of the specified unlawful activity in violation of....” In late January 2014, the FBI arrested two persons who operated Bitcoin exchanges; namely Charlie Shrem and Robert Faiella. They were charged with money laundering. It is interesting to note that the former was also an 44

Chapter 5 Where The Bad Guys Bought Their Guns, Narcotics and Counterfeit Money

executive of the Bitcoin Foundation; a position from which he resigned following his arrest at John F. Kennedy Airport in New York. You can be sure that many other drug dealers, pimps, thieves, etc., are endeared to laundering money. The same applies to terrorists. It’s such a popular activity that the United Nations estimates that the amount of money laundered annually on a global basis is between $800 billion and $2 trillion in U.S. Dollars. The United Nations has defined money laundering as: “any act or attempted act to disguise the source of money or assets derived from criminal activity.” In essence, it is the process of converting “dirty money” into “clean money.” Naturally, this has drawn the keen attention of law enforcement and regulators. It was the subject of a March 2013 report by the Canadian Standing Senate Committee on Banking, Trade and Commerce which wants to eliminate the $10,000 limit on reporting requirements. This, in spite of the fact that during 2010-2011, nearly 20 million reports had been submitted; of which less than 59,000 were regarded as “suspicious transactions.” Obviously, increasing the reporting requirements would be a regulatory nightmare with bureaucrats snowed under by mountains of reports. The Senate Committee also wanted to widen the net to include reports on cash purchases of automobiles, boats, precious metals, jewellery and art but nowhere did the 74-page report mention Bitcoin or cybercurrencies, in spite of the fact that Bitcoin lends itself as an attractive way to disguise the source of money.

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It appears that the Canadian Senate is far behind the technological curve since Bitcoin has been around since 2008 and their report was issued about five years later! This calls into question whether the Canadian Senate should be abolished, since it has become a destination for political hacks, fundraisers and cronies who have not been democratically elected. This is an idea that has been kicked around in the Canadian political arena for quite a number of years but, thus far, there has been no appetite to make this the subject for a national referendum and the chamber has been allowed to bumble along, even as some members are under investigation for sensational expense account irregularities at the taxpayer’s expense.

The 2014 Canadian Federal Budget Addresses the Bitcoin Issue In fairness, the February 2014 Canadian Federal Budget papers did address the Bitcoin issue. They stated: “It is important to continually improve Canada’s regime to address emerging risks, including virtual currencies, such as Bitcoin, that threaten Canada’s international leadership in the fight against money laundering and terrorist financing.” The Budget papers announced that laws and regulations would be changed to ensure that crime groups and terrorists cannot use bitcoins or online casinos to operate under the radar. This could imply that the average Joe could be suspected of being a criminal or a terrorist if all he wants to do is gamble online, purchase a bitcoin gift card or transfer money to some relatives back home. Methinks that this is a classic case of regulatory overreaction and is akin to trying to kill a flea with an elephant gun.

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Support for Whistle Blowers The Canadian Senate report did note the shortcomings of multinational financial institutions, such as HSBC, which in August 2013, was fined a staggering $1.9 billion for failing to comply with anti-money laundering and anti-terrorist financing requirements in various jurisdictions. The report suggested that there should be increased support for whistle blowers so that they can anonymously report on failures to comply. I must admit that I find this regulatory double-speak to be quite amusing in offering support for whistle blowers in Canada, while other regulators in the U.S. would dearly love to get their handcuffs around the wrists of Edward Snowdon and throw him in jail for doing his own whistle blowing! Never mind! Snowdon may get his own reward if the Norwegian Government’s vote to have him awarded the next Nobel Peace Prize (for making the world a safer place) gathers momentum in European and other world capitals where America’s spy initiatives have raised significant government ire and loud condemnation! I found it interesting that a Journalistic Source Protection Fund for Edward Snowdon has been established in the U.K and contribution payments are being accepted in bitcoins!

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Chapter 6 Could You Hold Bitcoins as an Investment?

Who Are the Largest Holders of Bitcoins? At the time of writing, there were roughly 11.75 million bitcoins in circulation with a price of about $800 each. If you do the math, it means that about $9.6 billions worth are available. Since bitcoins are held anonymously, it’s almost impossible to know who the identities are of the major holders but there are a few clues here and there. According to International Business Times (IB Times), Satochi Nakamoto, the originator or originators of the digital currency stashed the initial one million coins in numerous different wallets and, if true, that would put them well on their way to joining the billionaire’s club. One thing we know for sure is that the U.S. Government through the FBI is a major holder as a result of the Silk Road bust. Indeed, it seized 144,336 bitcoins in that raid, according to Preet Bharara, U.S. Attorney. That’s not all! A further 30,000 coins were seized in follow-up operations which would make their total grab worth about $14 million. Meanwhile, a couple of twins, going under the name Winlevoss, claimed in July 2013 that they had purchased 1% of all bitcoins in circulation at that time, which according to my estimation would account for roughly another 100,000 plus. 48

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If you scratch these numbers down on the reverse side of an envelope, they will account for 2 million bitcoins or approximately 17% of the total currently in circulation.

Do the Number Crunching! In its inditement of Dread Pirate Roberts, the FBI claimed that from February 6, 2011 to July 23, 2013, Silk Road completed 146,465 transactions on their site and “the total revenue generated from these sales was 9,519,664 bitcoins, and the total commissions collected by Silk Road from these sales amounted to 614,903 bitcoins.” What this suggests is that the FBI seizure accounted for only about one-third of the Silk Road take. Of course, some of the balance might have been used for “legitimate” expenses. What is interesting is that the FBI inditement stated that Silk Road had 3,877 unique vendor accounts. This in turn would imply that those vendors would have slightly under 8 million bitcoins in their possession. Back to the reverse side of the envelope and you can make a guestimate that fewer than 4,000 people (including the FBI) control about 9 million bitcoins out of a total of 11.75 million. That’s a staggering 77%. Blockchain.info provides another way of gauging the size of the market. It claims that 140,000 addresses are used to process approximately 60,000 transactions per day, however, multiple addresses may be used by individuals. It still confirms that relatively few people control the supply. 49

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

Red Flags are Waving! What all this number crunching means is that a relatively small number of people probably control over three-quarters of the bitcoins in circulation. This implies that the cryptocurrency is thinly traded which can be verified from its wild price swings and this, in turn, makes investing in bitcoins a precarious business. That’s not to say you can’t make money trading bitcoins as an investment, but it is also to say that you can lose a lot of money if the tide goes against you and some of the big players decide to dump their holdings.

Wild Price Swings In November 17, 2012, each bitcoin was worth slightly under $2 and by November 29, 2013, they were quoted at $1,242 in Japan; even after the Silk Road bust caused a temporary fall. However, the price of bitcoins took a real pummelling following the closing of the Chinese bitcoin exchanges in early December 2013. Prices have since recovered and at the time of writing, in January 2014, they were around about $800. Now if you were a clairvoyant you might have purchased a ton of bitcoins in November 2012 and sold them a year later for a staggering 600 times profit! But, let’s face it, if you are like me, you probably wouldn’t have even considered buying them until all the hype in the press, when they hit a new high!

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Is There a Better Way to Play the Bitcoin Investment Game? Well, many venture capitalists and angel investors seem to think so. They’re falling over themselves investing in companies with anything to do with the Bitcoin ecosystem. For example, Clinkle managed to raise $25 million and Coinsetter, a New York based start-up, filed to raise $1.5 million from venture capitalists in December 2013. Investing in start-ups is an area fraught with danger. You’ve really got to know what you are doing or you could get skinned alive. If you have oodles of money to invest, you might want to check out BitAngels (www.bitangesl.co) which claims to have invested about $7 million in bitcoin start-ups since its inception in 2013, but please do not take this as an endorsement.

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Who Created Bitcoin? Bitcoin was created in 2008. Not much is known about Satochi Nakamoto; allegedly the originator. Is it a “he”, “she” or an “it.” Popular theory attributes the creation to one programmer or several programmers. But could they also have been created by a cartel of crypto nerds intent on amassing a vast fortune for themselves, as the originators. Or, horror of horrors: could it be a Japanese crime syndicate? There’s nothing like a little publicity to flush a name clean! I hope this helps!

Bitcoins 101, Thanks to an FBI Agent Since I am not a cryptographer, I have been struggling to try and explain their creation in simple terms, ever since I started writing this book. Then when I was researching the court documents associated with the Silk Road bust, I ran across a relatively simple description in the inditement written by none other than the FBI agent in charge of the case. Of course, he had to do this in order to make the whole process clear to the presiding judge, 52

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assembled prosecutors and jury. Here’s his description and I commend him for it, but to make for easier reading, I have taken the liberty of removing the section and sub-section formatting. Bitcoins are an anonymous, decentralized form of electronic currency, existing entirely on the Internet and not in any physical form. [Publisher’s note: this is not strictly correct because they can also exist in a physical form as will be discussed later in this book.] The currency is not issued by any government, bank, or company, but rather is generated and controlled automatically through computer software operating on a "peer-to-peer" network. Bitcoin transactions are processed collectively by the computers composing the network. To acquire Bitcoins in the first instance, a user typically must purchase them from a Bitcoin "exchanger." In return for a commission, Bitcoin exchangers accept payments of currency in some conventional form (cash, wire transfer, etc.) and exchange the money for a corresponding number of Bitcoins, based on a fluctuating exchange rate. Exchangers also accept payments of Bitcoin and exchange the Bitcoins back for conventional currency, again, charging a commission for the service. Once a user acquires Bitcoins from an exchanger, the Bitcoins are kept in a "wallet" associated with a Bitcoin "address," designated by a complex string of letters and numbers. (The "address" is analogous to the account number for a bank account, while the "wallet" is analogous to a bank safe where the money in the account is physically stored.) Once a Bitcoin user funds his wallet, the user can then use Bitcoins in the wallet to conduct financial transactions, by transferring Bitcoins from his Bitcoin address to the Bitcoin address of another user, over the Internet. 53

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All Bitcoin transactions are recorded on a public ledger known as the "Blockchain," stored on the peer-to-peer network on which the Bitcoin system operates. The Blockchain serves to prevent a user from spending the same Bitcoins more than once. However, the Blockchain only reflects the movement of funds between anonymous Bitcoin addresses and therefore cannot by itself be used to determine the identities of the persons involved in the transactions. Only if one knows the identities associated with each Bitcoin address involved in a set of transactions is it possible to meaningfully trace funds through the system. Bitcoins are not illegal in and of themselves and have known legitimate uses. However, Bitcoins are also known to be used by cybercriminals for money-laundering purposes, given the ease with which they can be used to move money anonymously.

Example of a Blockchain The blockchain is an integral part of Bitcoin and consists of both a private and a public Key Block. I really want to illustrate this so I decided the easiest way was (pardon the pun: a “cop out”) where I used an example kindly provided by the FBI in Appendix B of its inditement against Dread Pirate Roberts of Silk Road notoriety. I’ve reproduced the illustration as follows:

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If you are able to decrypt all that, you will be heading for a Nobel Prize!

The public blockchain is one of the two main structures that keeps Bitcoin secure. It records every single transaction that ever takes place. By making it public, users from the entire Bitcoin universe have the details of every transaction at their disposal. By keeping it distributed and not controlled by a central agency, it means that any modifications have to be made by the entire community, in other words, central banksters can’t mess with it! The second feature is a private key and the cryptography is designed in such a way that the private key cannot be deduced from the public one. Obviously, it is important that the private key is not divulged by the owner of the bitcoin. 55

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

The Challenge of Handling the Nerdy Details Most writers on Bitcoin, gloss over the nitty gritty of what’s under the hood but I’ll try to be brave, and in the following sections, I’ll attempt to add some “nerdy” details to the above description.

The Hash Algorithm SHA-256 Put very simplistically, the Hash Algorithm SHA-256 is a set of rules that take data that is of an arbitrary length and gives it a fixed length using computer bit words (in this case 32 bit). It prevents both accidental or intentional changes being made. It is used in the blockchain.

An Explanation of the Mining Algorithm Bitcoin mining involves the creation of a new block in the blockchain. It is almost, but not completely impossible, to reverse the hash in a blockchain. It is the “not completely impossible” aspect that was turned into a global lottery by Satoshi and when miners were successful in doing so, they created a new block to add to the blockchain and were given a block reward. Satochi was able to set rules to increase the level of difficulty as time goes by and, in this way, he has been able to impose self-regulation on the Bitcoin money supply.

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Mining Hardware and Software To summarise, mining ensures that bitcoins are created at a predictable rate by means of a complex math problem with a precisely known difficulty. Those computers which are successful in solving the problem are awarded a block of the currency. These problems increase in complexity over time as more people i.e., “miners” join in to see if they can secure a block of currency for themselves. Bitcoin mining requires sophisticated software in combination with some very specialized hardware using Application Specific Integrated Circuits (ASICs). Actually, according to Bitcion.it/wicki, the mining process does not compute anything special. It merely tries to find a number (referred to as a “nonce”) which, in combination with the payload, results in a hash with special properties which can be added to the blockchain. The operating software will work a version of open source Linux, which is rather nice, because you don’t have to crawl to Microsoft every couple of years to buy its latest concoction of Windows. There are several companies which manufacture Bitcoin mining hardware. KnCMiner is a joint venture between two Swedish companies, ORSoC AB and Kennemar & Cole AB. When it introduced its new Juniper model with a tag price of $5,000 a pop, it racked up $3 million in sales in the first four days of release in November 2013 and was completely sold out. A new 57

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

model called Neptune is due out early in 2014 and has a sticker price of just under $10,000. In January 2014, CoinTerra came out with its $3,500 TerraMiner II and a more powerful TerraMiner IV with a sticker price of about $6,000. Other players in the space include Butterfly Labs, HashFast and BitFury. Be warned that all of these machines use up considerable amounts of energy; gobbling up to 3,000 watts, so you’d better keep an eye on your electricity bills! Some sceptics have pointed out that the cost of mining for a dwindling number of bitcoins may become cost-prohibitive well before the target date in 2040 is reached. If the return on investment isn’t worthwhile, it is possible that we may end up with fewer than the 21 million that was originally envisaged.

Block Reward The Bitcoin mining hardware and software permits valid blocks to be added to the end of the blockchain in a trial and error process. In a pre-determined process (level of “difficulty”) of finding a block that is valid, the system requires a lot of work to be done in order to extend the blockchain. This selfimposed “difficulty” ensures that only one block is added roughly every 10 minutes. Basically, the network is set up in such a way that this level of “difficulty” is maintained and never strays too far from this 10-minute benchmark. 58

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In order to ensure that the Bitcoin money supply can increase, successful Bitcoin miners are given a reward, currently set at 25 bitcoins (about $20,000 USD at current values). They are also entitled to levy a small transaction fee based on the amount to help offset the cost of mining which also involves verifying transactions. Unlike credit card transactions, the fee is paid to the miner and not to some central credit card company (VISA, MasterCard, American Express and their bankster affiliates) to cover the costs of processing the transaction and maintaining the infrastructure such as Point of Sale (POS) terminals together with the staff to maintain the system. So, “transaction fees” in the Bitcoin universe have a different meaning from those in the plastic credit card world. With respect to the Bitcoin miner’s reward, the policy that was encoded into the system reduces the reward by half once every 210,000 blocks, which works out to about once every four years. The next halving will occur in 2016. The reward system will end in 2040, when the total number of bitcoins will have reached the pre-set maximum target of approximately 21 million.

Solo Mining vs. Mining on Mining Pools Individuals can mine on their own as solo miners, but sometimes it pays to mine in pools and share the block rewards with other members of the pool. This could provide a steadier stream of income, as opposed to hit and miss of solo mining.

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Your Digital Wallet: Where You Stash Your Digital Cash I’ve referred to “wallet” quite a few times already. It’s the place to stash your digital cash. Special wallets have been designed to store and make payments in bitcoins. There are a couple of different flavours. MultiBit is an application which you can use on your desktop and it works with Windows operating systems as well as Mac and Linux. It supports several languages and can be set up in minutes by non-technical users. Armory is a more sophisticated wallet designed for desktop users. It features backups and additional encryption features. Bitcoin-Qt offers another wallet but it uses up a lot of computer memory, however, it features very high levels of security and accuracy. If you want a wallet for your smartphone or tablet, you might want to use a Bitcoin Wallet, which is an app that will work on Android devices as well as on the Blacberry operating system. It is relatively simple to use. On the other hand, if you want an app which does not use up a lot of resources, you may want to consider using Electrum, which has the added advantage that you can recover your wallet from a secret seed in the event of a mishap or theft. Mobile payment systems seem to be set for an explosive growth because of low transaction fees and could well eat into the lunch of PayPal, VISA, MasterCard and American Express, etc. 60

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If you want to find out how many bitcoins you have in your wallet, together with your transaction history, consider using BitcoinViewer.

Bitcoin Addresses Each time you want to receive a Bitcoin payment, you will need a new address because Bitcoin addresses are single use, unlike your postal address of your regular e-mail address. If Bitcoin takes off, you may well ask if enough addresses will be available. Well, relax, the nerds who created Bitcoin have figured that out and there will be trillion and trillions of addresses available for each and every living soul on the planet. (If you are mathematically inclined and want to challenge this statement, bitcoin,it.wicki has done the calculation for you and states that “keys are 256 bit in length and are hashed in a 160 bit address” which will give 215 followed by 120 zeros as the number of potential addresses per person.) So, unless you are intent on becoming a Bitcoin quadrillionaire, I don’t think you need to miss a night’s sleep over this issue!

What Happens When a Transaction Takes Place? When a bitcoin transaction takes place, the address of the sender together with the addresses of where the sender obtained the bitcoins is forwarded to the receiver; together with the amount to be transferred, time of transaction etc. Each transaction can be uniquely identified in the form of a shorter piece of encrypted information in the form of a hash. This information is incorporated into the blockchain and can be viewed by anyone, at anytime, 61

Bitcoin Mania: The Birth of a Worldwide Virtual Currency or the Start of an Insane Bubble?

on the network but since the addresses of the sender and the receiver are encrypted, they both remain anonymous. Bitcoin miners are constantly trying to add to the end of the blockchain in a trial and error process, in an attempt to extend it and obtain a block reward. In the process, they are confirming all transactions that are taking place; currently running at about 60,000 per day.

Can You Reverse a Transaction? Once you have received two confirmations of a transaction (which could take up to 10 minutes), it is reasonable to assume that the transaction has been confirmed by the network. It has most certainly been confirmed when six or more confirmations have been received.

Bitcoin Protocol: Watch Your “B”s and “b”s! No, I’m not referring to Bed and breakfast; a standard fare of the British hospitality industry, but to the upper-case “B” in Bitcoin and the lower-case “b” in bitcoins. Actually, “Bitcoin” is the name given to the protocol; whereas “bitcoins” are the stuff sloshing around in your digital wallet. So for those of you who are alert readers and have already noticed the occurrance of upper-case “B”s and the lower-case “b”s throughout the text, rest assured, it is not due to sloppy proof-reading but an attempt to toe the linguistic line!

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The Division of Bitcoins When you wander down to your local caffeine joint, you’re unlikely to pop a full bitcoijn (currently worth about $800) out of your digital wallet to pay the cute cashier for your favourite latte and tell her to keep the change. To overcome this kind of conundrum, bitcoins have to be divisible. A full bitcoin is often referred to as a “BTC” and this full unit can be subdivided simply by shifting the decimal place over to the right by up to 8 places. This leads to a whole new set of crypto digital lingo as follows: • • • •

One bitcoin = 1 BTC One-hundredth of a bitcoin is called a “bitcent” One-thousandth of a bitcoin is called an “mbit” One-millionth of a bitcoin is called a “ubit”

This subdivision of the cryptocurrency overcomes the upper limit of 21 million bitcoins that can be created. If you subdivide by up to a millionth, you will end up with 2.1 quadrillion units. So, at the current price of around $800 a BTC, a ubit would be worth about $0.0008 or .08 ¢. So, that should satisfy the most exacting requirements of accountants who are billing their clients by the nanosecond! It also solves the problem of dealing with micropayments for digital publications. When I want to read an article in the digital version of a journal, newspaper or magazine, I don’t want to have to subscribe for a whole year, when all I want is to read one article. I certainly don’t mind

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paying a few cents to get access to the material that I need. So, what better way to do it–use sub-divided bitcoins. Actually, a relatively new California-based start-up called BitWall (www.bitwall.io) has designed a system for merchants which will enable them to accept payments for as little as one cent. At the time of writing, their system was still in beta and they didn’t offer any examples of merchants using their system; nonetheless, I think their idea has a lot of potential. The major credit card companies don’t want to hear about micropayments using conventional cash. In fact if a merchant’s average billings are under $5 they’ll probably want to get rid of them simply because the charges they can levy don’t make up for their precious administrative time and the cost of maintaining the Point of Sale (POS) terminals. So, I think there’s a place for Bitcoin being used as the basis for accepting micropayments.

Physical Bitcoins Since bitcoins are gaining traction as a method of payment, there are challenges for the people of the world who live in Internet dead zones, such as a Bedoin in the Sahara who wants to buy a new saddle for his camel or an Eskimo in the Arctic who wants to purchase a new snowmobile. Obviously, these folks are probably not in a position to purchase anything online but maybe they want to pay their local brick-and-mortar merchants with bitcoins. This is where the physical Bitcoin comes in.

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Essentially, a physical bitcoin is a metal coin with a microchip containing the blockchain embedded inside it. If the blockchain isn’t included, they are basically just a piece of metal. According to the Financial Times, in November 2013, the British Royal Mint was reported to be exploring the possibility of creating a commemorative bitcoin. This, in spite of the shut-down by the Financial Crimes Enforcement Network (FinCEN); a division of the U.S. Treasury, of a similar scheme using Casascious Coins. Actually, the whole idea of physical bitcoin flies in the face of concept of Bitcoin as a digital cryptocurrency in which the blockchain is added to when a bitcoin changes ownership. This becomes impractical when dealing with a physical coin. There are also other issues with physical bitcoins which I will discuss later in the book. Meanwhile, I’ll keep you guessing!

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Chapter 8 Bitcoin Exchanges: How to Get Your Hands on this Digital Cryptocurrency

The Challenge of Convertibility Bitcoin is still in its infancy. The average person in the street has probably never heard of bitcoins; let alone used them and, until that changes, there has to be a bridge between the virtual world of bitcoins and the physical world involving the multitude of physical currencies in everyday use around the world. There are several ways you can acquire bitcoins. As I have discussed, you could become a miner and create bitcoins of your own, but that is expensive and time-consuming and not something that most people in the 9 a.m. to 5 p.m rat race have time for. You could also sell a product or a service and receive payment in bitcoins. If you acquire bitcoins as a miner or as a result of selling something, you may want to cash them into paper currency. That’s where Bitcoin exchanges come into play. You may also have an urge to purchase bitcoins so that you can use them as a currency to purchase goods or services, to buy gift cards, to gamble or to send money overseas. Again, you will need to use the services of a Bitcoin exchange. 66

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Team Bitcoin (www.teambitcoin.com) publishes a list of 160 exchanges around the world.

Bitcoin Automated Teller Machines (ATMs) One obvious way to obtain bitcoins is to go to a Bitcoin ATM machine. In October 2013, the world’s first Bitcoin ATM machine opened on Howe Street in Vancouver, B.C. It recorded trades of over $100,000 in its first week with lineups every day. At the time of writing, it only accepted cash and the bitcoins were sent by e-mail to your digital wallet, via the VirtEx Exchange. In mid-January 2014, an ATM machine opened at King Street West and Spadina Avenue in Toronto. I visited it briefly but did not have to fight my way through crowds to reach it, which in itself was quite revealing. It would only dispense bitcoins in return for payment in cash and would not do the reverse. Also, it requested that the user enter a cell phone number in order to receive a pin number that would allow them to continue with the transaction. I assume that this information could be passed on to authorities and this, in turn, would remove the element of anonymity which is touted as a major benefit of Bitcoin. Another ATM has opened in the Clocktower Brew Pub on Clarence Avenue in Ottawa. A machine has been opened at Montreal Bitcoin Embassy on StLaurent Boulevard close to Sherbrooke Street.

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BitAccess, which own the machines in Toronto and Ottawa has plans for other Bitcoin ATMs in Winnipeg, Manitoba, London, Ontario, Mexico City and in the cities of Melbourne and Sydney, Australia. I’ve heard of plans to open an ATM in Washigton, D.C. In December 2013, an ATM machine was installed in Helsinki, Finland at a record store in the railway station. Unfortunately, these Bitcoin ATMs are few and far between, especially when compared with the vast number of banksters’ ATM machines; estimated at 18,300 in Canada and 2.2 million in the U.S. Let’s face it, the vast majority of people have easy access to a paper currency dispensing machine but do not have easy access to a Bitcoin ATM machine.

Coinsetter Not an exchange in its own right, Coinsetter, a New York based start-up, features a trading platform which aggregates prices from different exchanges. In late December 2013, it had filed to raise $1.5 million from venture capitalists.

Take Care! When dealing with a Bitcoin exchange, you should take great care to make sure that you are dealing with a reputable organization and not some fly-by-

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night operation that is going to take your money and give you nothing back in return. Even reputable exchanges, like Mt.Gox, Japan’s leading exchange, have been hit with Distributed Denial of Service (DDoS) attacks and you certainly don’t want to get caught up in one of those. Also, exchanges are exposed to unexpected and sudden (often irrational) actions by regulators or law enforcement agencies who happen to get out of bed on the wrong side one morning. This has already happened in China, where exchanges were abruptly shut down. A heavy thundercloud of potential Bitcoin regulation hangs over the market and you may end up in a situation where you have acquired bitcoins but are unable to easily exchange them into paper currencies. Definitely DO NOT store your bitcoins with any third party. There are horror stories of such organizations being the subject of attacks by hackers or simply just absconding with the funds. The safest place for your bitcoins is in your own digital wallet.

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How Safe are Bitcoins? Bitcoins are probably about as safe as most paper currencies. Traditional commercial banksters are the subject of frequent stick-ups by robbers, but most of this goes unreported in the press because the banksters don’t want their customers to feel they are unsafe when they visit their local branch. Also, they don’t want to publicize their vulnerabilities to the criminal world. I will admit that time-delayed money safes pose a considerable deterrent to potential thieves who don’t want to hang around for the 10 or 15 minutes it takes to gain access to a safe, while a silent alarm may have alerted law enforcement. Because of the distributed, peer-to-peer nature of bitcoins, a stick-up scene is unlikely to occur but they are exposed to other threats and I will attempt to cover these briefly.

Internet Outages Since bitcoins have to rely on the Internet for exchanges and transactions, they are exposed to times when Internet connections go down. This could be

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due to power failures or physical damage to the infrastructure or to the malfunction of servers. During the ice storm which hit Toronto in late December 2013, I know of customers who had no broadband access to the Internet for up to 10 days following the storm. The ice on trees caused branches to snap and fall on power lines, cutting off power to the nodes that supplied cable access to home and businesses over much of the city. The massive 2003 power outage involving the Northeastern U.S. and parts of central and eastern Canada caused generating stations to go offline all the way from New York City to Toronto and shut down access to the Internet. In 1989, a huge geomagnetic storm caused by a Solar Wind knocked out Hydro Québec’s main transmission lines from the James Bay and caused outages in much of Québec and customers in the New England States. Obviously, Internet connections were affected although phone line Internet connections were still in their early stages of development in those days. These should not be considered as one-off events. At the time of writing, in late January 2013, ice storms continue to ravage much of Canada and the United States; cutting off Internet access. The 1989 geomagnetic storm which hit Québec is an event that could easily be repeated. In fact, the Earth’s magnetic field has flipped many times in the past as evidenced by the orientation of magnetically charged minerals in hot volcanic rocks which froze into alignment (just like compass needles) with the Earth’s magnetic field, before that lava cooled.

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The scary thing is that the next polar reversal appears to be overdue and when it occurs, the Earth could be directly exposed to solar winds during that changeover. That, in turn, could knock out electric power grids, cause communication satellites and GPS systems to malfunction, shut down the Internet and cause havoc in the world of commerce and finance. Obviously, your stash of bitcoins could be obliterated by magnetic waves. Mind you, the whole world banking system would also be thrown into chaos if there is no electricity and you probably will not be able to gain access to your bank; let alone to your paper money. So, better save those gold coins in an old sock under your mattress–they could come in handy!

Distributed Denial of Service (DDoS) Distributed Denial of Service (DDoS) occurs when an attempt is made to render a network unavailable as a result of a multitude of computer systems which have been infected with malware (usually a Trojan Horse) to make a simultaneous attack on a single target. The result is a denial of service at that target. For example, in 2013, as a result of a DDoS attack, the Japanese company, Mt.Gox, which is a Bitcoin exchange, was unable to process payments and an online payments provider, Dwolla was also taken offline around the same time.

Guard Against Digital Pickpockets! Your digital bitcoin wallet is similar to a physical wallet. A pickpocket could snitch either of them but in the case of bitcoins, there is a public blockchain 72

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which everyone can see but there is also a private key and so long as that is kept under guard, it is not possible for a thief to figure it out from the code contained in the public key.

Double Spending Because it takes 10 or more minutes for confirmation of an addition to the blockchain when a transaction is made, it is conceivable that another transaction could take place in much less than 10 minutes which would result in what is known as a “double spend.”

Finney Attack A Finney Attack is a variation of the double spend, except it is employed by a fraudulent miner who has just successfully mined a block. In this attack, he sends some or all of his newly mined money to himself and then, within seconds sends the same money for a purchase of something. This action “withholds” or delays the release of the block for the purchase with the result that the first transaction of the fraudster sending the money to himself is confirmed by the network and the money being sent for the purchase is “0/unconfirmed” i.e., cancelled. Unfortunately, the merchant or trader has no recourse against the fraudster because it can be argued that they did not wait for confirmation, plus the identity of the fraudster is protected by the system! This can be a problem if the purchase is made for something that is immediately downloaded digitally upon receiving what appears to be a

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genuine payment. Because of the costs of mining, it would only pay off for the fraudster if the amount involved is reasonably significant. I should alert you to the fact that a minimum of two confirmations is the least that is required and by the time six or more confirmations have been received the transaction is locked down permanently into the blockchain. There can be a 10 to 20 minute delay until these confirmations are received and this is a built-in weakness when using Bitcoin.

Race Attack The Race Attack is yet another variation of the double spend and preys on merchants who accept payments which are “0/unconfirmed.” Basically, a purchase is made to a merchant and simultaneously the attacker sends a different transaction or a whole series of different transactions that spend the same coin. The network will pick up the fact that these transactions are fraudulent, however, the delay in detecting this and the non-recourse nature of the transactions can be costly for merchants who don’t wait for confirmations.

Transaction Malleability “Transaction malleability” was a term that reared its ugly head in early February 2014 when Japanese Bitcoin Exchange, Mt.Gox, suspended withdrawls. This type of attack involves changing the ID of a bitcoin transaction before it is confirmed by the network. Such an attack is not 74

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catastrophic if done at an individual transaction level but could become very serious if a concerted attack is made on a multitude of exchanges, as appears to have been the case in this instance. The issue could be resolved by doublechecking signature data before it is passed on.

The Greater Than 51% Attack This type of attack exposes a basic flaw in Bitcoin and could theoretically occur if one miner (or a mining syndicate) controlled over half of the mining hashrate (i.e., “activity”) and was able to manipulate the whole network to their advantage. In so doing, they could manipulate the blockchain; deny confirmations and thereby prevent bitcoin transactions from taking place. They could also stop other miners from finding new blocks. In other words, a Greater Than 51% Attack could cause considerable panic and pandemonium in Bitcoinland but, while it could tarnish the Bitcoin reputation and take some time and effort to fix, it would not cause a nuclear Bitcoin apocalypse because such an attack would not be able to reverse or undo previous transactions and would probably not yield much financial benefit to the attacker. Also, the chances of such an attack happening are pretty remote since it would require a gigantic amount of computing power.

Other Attacks While other potential and very sophisticated attacks have been identified, it appears that none of these pose any immediate threat to Bitcoinland. In my view, the greatest threat will come from government over-regulation; a topic which I will cover in more detail later in this book. 75

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Could Bitcoinland Develop into a Digital Tax Haven? This is an entertaining thought! Since the identities of owners of bitcoins are concealed and transactions take place anonymously, government tax hounds have a hard time sniffing out any tax cheating trails in cyberspace. If a Bitcoinlander invests in bitcoins and their value soars, can he conceal his gain from capital gains tax? Well, only if he cashes out in the same way as a shareholder in the stock market sells stock after making gains. The catch here is that brokerage firms are required to divulge those gains to tax authorities. In Bitcoinland there is no central reporting authority! If a Bitcoinlander buys something anonymously and then sells it (anonymously) at a profit and keeps the proceeds in bitcoins, there is no central authority that will report a violation of sales tax laws or report evasion of paying income taxes. Another interesting thought is that you don’t have to pack your sun screen and head off to some island resort in order to hide your activities from revenue hungry governments. Instead, you can sit under a virtual coconut tree in the comfort of your living room.

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Obviously, government tax hounds are not too thrilled about the anonymity that bitcoins offer potential tax cheats. As they will zealously point out: why should honest law abiding citizens, who diligently pay their taxes, make up for the shortfall in government revenues? Of course, you could be cynical and ask why unsuccessful presidential candidate Mit Romney and his wife managed to engineer effective federal tax rates of only 14.1% in 2011 and 13.9% in 2010, when the average honest working sod paid at a much higher rate. The obvious answer is that the average sod cannot afford to pay for the advice of highfalutin tax mandarins at the major law and accounting firms. Welcome to social engineering, where the rich get richer and the poor get poorer! So, could bitcoins develop into a tax revenge for the trodden down middle class?

Bitcoin’s Status in Taxland is still to be Defined At the time of writing, the IRS had still to pontificate on the tax treatment for bitcoins. The same is true in the U.K. where the sales VAT tax does not apply to the purchase or sale of currencies that are considered to be legal tender; but then, Bitcoin has not been elevated to that status. The Scandinavian countries are taking a stab at taming the Bitcoin beast. For example both Norway and Sweden want to apply a capital tax and Denmark wants to amend existing financial legislation to encompass Bitcoin exchanges.

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These different regulatory regimes could lead to Bitcoin exchanges becoming decentralized; with exchanges in different countries or cities, which could bode well for Bitcoin’s ultimate survival. Exchanges could also migrate to more welcoming tax jurisdictions, if tax authorities in a particular nation become too zealous. In reality, it would take a concerted effort by every one of the 192 nations of the world to agree on a uniform tax framework, and that is as unlikely as creating worldwide peace.

A Similarity Between Bitcoins and Fiat Paper Currencies Actually, bitcoins and fiat paper currencies have some common features from a taxation viewpoint. Now, I definitely do no want to imply, that as an honest tax abiding reader, that you would do this but let’s say a contractor offers to fix your front porch for $xxx with payment in cash, do you seriously think that he’s going to pay sales taxes on that amount or declare it as income when he files his tax returns? This same reasoning would apply if the payment were to be made in bitcoins. From a tax collector’s viewpoint, these transactions are hard to detect unless your phones are tapped by the National Security Agency and a secret Foreign Intelligence Surveillance Court (FISA) determines that the fixing of your porch could make it easier for potential terrorists to enter your house. OK...enough of that!

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Back to the contractor. If he keeps the cash under his mattress, the tax authorities will be none the wiser. Similarly, if he keeps the bitcoins in his digital wallet. On the other hand, when the contractor goes down to his local auto dealership and buys a new truck and pays in cash or in bitcoins, the tax hound may sniff it out and demand to know where that money came from!

A Difference Between Bitcoins and Fiat Paper Cash When it comes to capital gains, there is a very distinct difference between bitcoins and fiat paper cash. Bitcoins can increase or decrease in value while they are being held. Cash cannot increase or decrease in value, so long as it is held within a nation state, however, its purchasing power can decline as more and more of it is printed or in response to inflation. On the other hand, cash held outside of a nation state can increase or decrease in value in terms of its purchasing power. OK...let me provide an example. When I wrote this, Argentina was creaking at its financial knees. The Peso had just been devalued which meant that anyone holding U.S. dollars would have seen the purchasing power of that money increase dramatically overnight. Let’s cut to the chase. If you reside in the United States and hold U.S. dollars, you will not be liable for capital gains tax if the value of the dollar goes up relative to other foreign currencies. On the other hand, if you purchased bitcoins at an exchange and their price increased, and you later sold them, you would have incurred a capital gain. 79

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Instead of selling them, let’s say you purchased goods with them, theoretically you would still have made a capital gain. But, let’s play Devil’s Advocate! Say the goods you purchased had increased in price at the same rate that your bitcoins increased in value, you wouldn’t actually have made any gain in the real world, because your inflated bitcoins were used to purchase inflated goods! I doubt that this would engender much sympathy from the mandarins at the IRS and I am sure they are tugging at their beards to figure out ways of squeezing as many bitcoins as they can out of you in cyberspace.

The Anonymity of Bitcoins and Fiat Paper Cash The anonymity afforded by both bitcoins and fiat paper cash present a major challenge to government tax hounds. Unlike credit and debit card transactions, payments made by check or bank transfers, there is no paper trail...nothing they can get their teeth into! Unfortunately, it seems to me that we may be heading towards a day when the anonymity of the Bitcoin may be stripped away and the real identities of owners revealed. This is such a contentious topic that I will revisit it later in this chapter and also in the concluding chapter.

The Tax Treatment of Bitcoin Mining and the “Equipment” Used There are still some fuzzy areas when it comes to mining for bitcoins. 80

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As I explained earlier, the equipment can be quite costly. Depending on your jurisdiction, it should be possible to amortize or depreciate this over a number of years. The challenge from a miner’s viewpoint is that the equipment can become very outdated relatively fast and require replacing and most tax depreciation schedules do not allow for fast write-offs. There is a considerable expenditure in electricity in the mining process. It should be possible to claim this as operating expense. If the equipment resides in your basement, you should be able to claim part of your rent or your mortgage as a legitimate business expense. Substantial amounts of time are required in the mining process. Can mining “wages” be deducted? If you hit the jackpot and receive a reward in bitcoins, I assume that the reward will be taxable. What about the transaction fees that you can levy? They will probably be taxable as income. Of course, since there is no central controlling agency and everything is done anonymously, how will government tax hounds sniff out such rewards and fees? Good question!

How the Taxman Deals with Bitcoin Exchanges I assume that Bitcoin exchanges will be treated like any foreign exchange dealer but in United States there is one trick that makes the tax hound’s bite something to be avoided.

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In the US, Bitcoin exchanges are required to register as money service businesses and to have anti-money laundering programs in place. This includes the reporting of cash transactions in excess of $10,000. The registration process can be quite onerous, costly and time consuming with the result that there are relatively few exchanges operating in the U.S. However, other countries, such as Canada, have adopted a much more relaxed approach to exchanges, insofar as the regulatory environment is concerned but the Canadian situation may be about to change as a result of comments made in the February 2014 Federal Budget. The Bitcoin ATM in Vancouver only takes cash and cash has no trail unlike a credit or debit card or even a bank transfer. So far as I know, that particular ATM limits transactions to $1,000 but that’s not to say that someone cannot keep going back time and time again. Will this ultimately mean that tax hounds will insist that hidden CTV cameras be installed or that bitcoin purchasers identify themselves with photo I/Ds thereby unmasking their anonymity? Will Orwell’s Thought Police be lurking round the corner ready to pounce on unsuspecting users of the ATM and interrogate them in order to find out where the cash came from and what the bitcoins will be used for? It could all be done under the guise of national security! If the National Security Agency (NSA) can snoop on every earthling’s emails and phone calls, why couldn’t it spy on their thoughts to detect a possible crime before it can be committed? In the process, they could put the tax hounds onto the scent of any suspected evaders and, as a sop to calm 82

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foreign governments, pass on their suspicions of tax evasion to their tax authorities. It could get very, very scary out there in Bitcoinland!

Will the Taxman Regard Bitcoins as a Commodity, a Capital Asset, a Non-Capital Asset, a Foreign Currency or as Part of a Network? I am not a tax accountant nor am I a tax lawyer but I do know enough to state that the taxation status of bitcoins is in limbo at the time of writing, and if you are worried about the matter, you should seek professional advice; hopefully from somebody who is familiar with the state of play. Also, be alert to the fact that tax laws and regulations which apply in one national jurisdiction, may not apply in another; even though Uncle Sam seems to be able to develop very long arms; especially when roused!

One Thing is For Sure! The tax hounds are working on it!

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A Comparison Between Bitcoins and Gold The English Cashier Said: “That'll cost a Soverign, love.” Indeed, you may well have heard her said that in the days of Charles Dickens. Back then, the Sovereign was a small gold coin which was valued at one pound sterling. They were minted in the United Kingdom from 1817 until 1917 and again in 1925. Various Commonwealth countries also minted them from 1957. In 2009, The Royal Mint released a Quarter Sovereign. Obviously, the more recent mints are for collectors or held for investment purposes so, you won't see anyone paying for their groceries with one.

Gold as a "Store" of Value The present use of gold coins is for coin collectors but more importantly for investors. However, there are other ways of investing in gold; for example you could purchase gold bars, wafers etc. You could also invest in a physical gold exchange traded fund which can be bought and sold on a stock market, where each share you buy is backed up by physical gold held in a vault somewhere. You could also buy shares in companies that mine the stuff. Alternatively, you could buy gold futures or invest in a mutual fund that specializes in the metal. 84

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When Gold Coins were First Used as Money According to the National Mining Association, gold was first used as a currency around 1500 BC when the people in Nubia, in modern-day Egypt, began using gold as a medium for international trade. Around the same time, a coin made of about 2/3 gold and 1/3 silver made its appearance in the Middle East. This was known as the "Shekel.” In 1091 BC, gold in the form of small square coins were legalized as a form of money in China. The first coins of pure gold were made in the ancient Kingdom of Lydia, located in Asia Minor. That was about 610 BC. In the year 50 BC, the Romans began issuing gold coins called the “Aureus.” Jump many centuries later, and in 1284 AD, Venice (at that time a major maritime trading power) issued the gold Ducat. The English, not to be outdone, issued the Florin; their first gold coin, in the same year. In 1782 AD the Coinage Act in the United States defined the U.S. Dollar as being a bi-metallic coin which was mostly silver but with slightly over 6% gold. This was followed in 1900 with the Gold Standard Act which was designed to establish gold as money carrying a fixed exchange rate with other countries.

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Two things caused the unravelling of gold as a “standard.” They were the debasement of gold coinage and finally the abandonment of the “Gold Standard.”

Debasement of Gold Coinage Pure gold is a very soft metal. If you bite on it, your teeth dent marks will show. In the past, this was used as a quick test to determine if a coin was made of pure gold or not. In practice, many “gold” coins contain other metals in order to increase their hardness. The most common additive was silver, although copper was also used. However, by decreasing the amounts of gold in a coin, rulers were also able to debase their currency. Probably the most famous or infamous debasement of gold coinage as a currency occurred many years ago. According to Professor Joseph Peden in a lecture delivered in 1984, entitled Inflation and the Fall of the Roman Empire, debasement started after the reign of the Roman Emperor Augustus, when gold coinage was circulated with a weight of 45 coins to a pound of gold. Under Emperor Caracalla, the gold content was reduced to 50 coins to a pound and further reduced to 60 during the reign of Diocietian, who ruled from 284 A D to 305 AD. Diocietian also debased the silver coinage. In a desperate effort to bring inflation under control, Diocietian also introduced wage and price controls, however, his efforts failed and by the time he abdicated, inflation stood at close to 100%.

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Obama Adminstration's Debasement of Coinage In a twist of irony, the U.S. Mint as recently as 2012 was facing a similar Diocietian problem, where inflation in the price of metals has caused the one cent coins and the nickel coins to have higher metal content values than they are worth. As a consequence, the Obama Administration is seeking the permission of Congress to debase the currency! Canada has recently eliminated the one cent coin or “penny” as legal currency for much the same reason.

The Introduction of Banknotes Commercial banks in England began issuing banknotes which were paper money and could be redeemed at the issuing bank for gold or silver. Similar banknotes were issued by banks in the United States and the fad caught on, so much so that at one time there were as many as 5,000 different types of notes in circulation. Unfortunately, many banks issued more notes than the gold and silver held to back them. A sudden lack of confidence in the paper money could cause customers to rush to their bank in an attempt to convert their paper money into the precious metals. If a bank had insufficient gold or silver to hand out to their customers, they were forced into “bankruptcy.” In 1694, the Bank of England was granted the sole right to issue banknotes in England. The United States followed more than 200 years later, when in 1913, the Federal Reserve Bank was granted similar rights. Theoretically, the 87

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paper currencies that were issued could be converted into gold or silver. In practice, people did not ask for their paper to be converted and based their trust in the credibility of their respective governments.

The Gold Standards In 1900, the United States passed the Gold Standard Act which committed the United States to maintain fixed exchange rates with other countries. This was followed in 1913 when Federal Reserve Notes were required to be backed by 40% in gold. It was suspended during World War I and partially reintroduced in 1934, when President Roosevelt reduced the value of the dollar, by setting the price of gold at $35 per ounce, but convertibility was restricted to foreign banks. To make sure that American citizens could not demand to convert their paper money into gold, in the previous year, he prohibited them from owning gold coins, bars or certificates of gold ownership. A further draconian measure was introduced in 1942, when Roosevelt issued a presidential edict to cause all American gold mines to be closed. In 1961, the American Government forbad Americans from owning gold in foreign countries, as well as domestically. The British Gold Standard Act was passed in 1925 and this permitted the conversion of banknotes into gold bars but not into gold coins. The Act was suspended in 1931 because of large outflows of gold. Essentially, the “Standard” was found to be unwieldy and unstable. In 1931, major commercial banks in both Austria and Germany failed after a run on the gold that backed their currencies.

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Bretton Woods Bretton Woods was a conference which took place in July 1944, at which the world's major industrial powers agreed to establish a set of rules for commercial and financial relations between them. The rules were not fully implemented until late in 1958. The Bretton Woods Conference was an attempt to find a way to rebuild the world’s economic system after World War II. It led to the creation of the International Monetary Fund (IMF) together with an organization which was the predecessor to today’s World Bank. Another important decision at Bretton Woods was to require the participating countries to tie the exchange rates of their currencies to the U.S. dollar. It also permitted the IMF to provide temporary bridge financing in the event that there was an imbalance of payments. Bretton Woods collapsed in 1971, when President Nixon abruptly terminated the ability of foreign governments to ask for their holdings of U.S. dollars to be converted into gold. This was the beginning of modern fiat paper money.

The Globalization of World Banking When I was researching for this book, I tried, without success, to find an allencompassing figure that would give you an idea of the size of the world's commercial banking system, but all I can tell you is that worldwide bank assets run into the hundreds of trillions of dollars. 89

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Size is one thing, but what is very worrying is that the world of banking has become very interconnected and trouble in one area can very quickly spread to other areas, as contagion spreads fear throughout the financial system.

The Near Collapse of the World Banking System In September 2008, the collapse of U.S. banking giant, Lehman Brothers, sparked a massive credit crunch which spread rapidly across borders and very nearly caused a systemic failure of the entire global banking system. Governments rushed in to prop up ailing banks, businesses found it nearly impossible to get new loans to maintain and grow their operations. Politicians have woken up to the hazard of having banks that are “too big to fail” and have instituted a number of measures to try to prevent a repeat of the Lehman Brothers fiasco. The focus, since 2010, has been on the Eurozone sovereign debt crisis involving Greece, Portugal, Ireland, Spain and to a lesser degree Italy. Harsh austerity measures have been put in place to try and get the national debts of these countries under control, but it remains to be seen whether they will be successful.

Fractional Reserve Banking How would you like it if you had just one fiat currency dollar in your pocket and your friend Joe needed some money to purchase some basic groceries. Because you like Joe and you don’t want to see him go hungry, you agree. 90

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So, you loan Joe ten bucks. Now...wait a minute! You only have one dollar in your pocket...so where did the other nine dollars come from? Unless you are a magician, you will not be able to create those extra dollars. If you are a commercial bankster, you can perform this kind of magic. It’s called “Fractional Reserve Banking” and it allows commercial banks to loan out $10 for every $1 they have on deposit. Unfortunately, during the period leading up to the financial crisis of 2008, because of deregulation, many U.S. and European banks were loaning out more than $10 for every $1 they had on deposit. On top of that, the $1 on deposit may not have been in a form that could be quickly accessed in an emergency e.g., if depositors suddenly wanted their money out in a hurry because of a lack of confidence in the bank. This kind of “run on the bank” was a major factor in the collapse of Lehman Bros.

Bitcoins Cannot Play a Role in the Magician’s Game of Fractional Reserve Banking A bitcoin is a bitcoin...is a bitcoin...and no amount of magic can create ten bitcoins out of thin air. Yes, if you have one bitcoin in your digital wallet, you could lend your friend Joe one bitcoin...but no more! You are not in a digital version of the Hall of Mirrors in the Palais de Versailles, where you could hold up one coin and see many more in the reflections. Commercial banksters can perform this trick and tell any poor sod who objects to go and eat cake. Since Bitcoinlanders.can only lend the actual coins in their virtual wallet, the wide adoption of such a cryptocurrency could keep commercial banksters 91

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respectable. They could only loan out the bitcoins they actually have on deposit. They would no longer be exposed to a “run” on their bank if confidence fails. Great idea, but you can bet the commercial banksters don’t think so! Great idea, because the government wouldn’t have to use your taxpayer dollars to prop up banks that are deemed to big to fail! Again, you can bet the commercial banksters don’t agree! If they know that the government will save them if they run into trouble, they are free to take greater risks. Let’s go back to Joe as an example. Suppose through the magic of Fractional Reserve Banking, you loan Joe your last ten bucks to buy some food, but instead, Joe goes down to the race track and places a $10 bet on a horse that doesn’t win. Then, a chastened Joe comes back to you and asks if you will loan him some more money. If you are like most people, you will probably tell Joe to go jump in the lake because $9 out of the $10 were created through the magic of Fractional Reserve Banking! Now, not only are you furious at Joe for losing the money but you are now on the hook for $9 that you don’t have! The tables have turned...you are in debt! Not so with a commercial bankster that has been deemed too big to fail! If he has used all the money making loans to people who make bad bets, he will simply go to the government to and get bailed out with YOUR TAX DOLLARS because he has been anointed as being “too big to fail.” Yes, the universal adoption of Bitcoin could turn commercial banksters into respectable citizens! “What’s that you said: ‘what planet am I on?’” You could be right in asking that question!

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Bitcoin Mortgages Earlier in this book, I told you of a house that was for sale in exchange for bitcoins. So, could a mortgage in bitcoins be made with the house posted as “collateral”? In theory, yes! In practice, no, because the value of bitcoins are not stable enough. You could have a mortgage for 250 bitcoins or roughly $200,000 the current exchange rate of about $800. But what would happen if two months from now bitcoins hit a new high of $1,600? Your mortgage would suddenly have doubled to $400,000. On the other hand, if the value of a bitcoin dropped to $400, your mortgage would be reduced to $100,000! If the entire economy ran on Bitcoin rather than fiat paper currencies, Bitcoin mortgages would make sense but at the current time the exchange rates into fiat currencies are too volatile to make this a serious option.

Changes to the Regulatory Environment Which Will Affect Bank Financing A number of significant changes have already taken place in the U.S. that are designed to prevent another financial meltdown. These changes will also (hopefully) lead to a better framework in which small business owners can obtain the loans they need in order to grow. First, let’s step back and look at how the whole mess started in the first place.

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The Repeal of the Glass-Steagall Act The Glass-Steagall Act came into effect in 1933. It was championed by President Roosevelt as a means of curbing the power of large banks and stop them making investments in one another, in stock brokerage firms and in insurance companies. It was seen as a means of taming the excesses which had led to over 5,000 bank failures in the wake of the 1929 Wall Street Crash. In 1999, President Clinton and the U.S. Congress passed the Financial Modernization Act, which essentially killed the Glass-Steagall Act and abruptly deregulated the U.S. banking industry. Many critics blame this deregulation for the events which led up to the financial crisis of 2008-2009. Since then, U.S. politicians and regulators have been scrambling to force the deregulation genie back into its bottle.

Dodd Frank Bill The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama in 2010. Its stated objectives can be summarized from the text of the Bill, as follows: “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.”

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The Volker Rule The so-called “Volker Rule” named after a former Chairman of the Federal Reserve, is designed to curb proprietary trading and excessive risk taking by U.S. banking giants that are considered “too big to fail.” At the time of writing, the Rule had not been implemented but there has been much heated debate about some of the implications for banks which operate outside of the United States which could get caught up in the web of regulations. Current hopes are that the rule would be put in place during 2014.

Increasing Scrutiny in the UK In the wake of the 2008 financial meltdown, the British Government was forced into taking an 84% interest in Barclays and 43% in Lloyds. As a reluctant stepfather, the British Government now wields a big stick, however, the banks still maintain their independence and this has not been helpful in facilitating small business loans in order to grow and create employment.

Canadian Banks Relatively Unscathed Because banking deregulation was not allowed to proceed to the same degree as in other nations and reserve requirements were maintained, the industry as a whole escaped the carnage which befell the U.S. and U.K. banks.

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The Basel Agreements Central bankers from around the world met in 1988 to publish a minimum set of capital requirements for banks. The “Basel Accord,” as it is named, has gone through three iterations; the most recent of which is Basel III. This is designed to strengthen the adequacy of banks by imposing “stress tests” to make sure that they could better withstand another financial crisis.

Now that Big Banks Have Been Brought to Heel, Does it Mean You Can Get a Loan More Easily? Probably not, but at least it has focussed a lot of attention on the subject! The Obama Administration’s Jobs Bill which was designed to help smaller firms gain access the equity, initially became ensnared in the political infighting in Congress, however, an element of it emerged under the name “Jumpstart Our Business Startups Act” which received Congressional approval on March 27, 2012 and was signed into law by President Obama on April 5, 2012. Insofar as the US, the U.K. and Canada are concerned, banks still appear to be reluctant to loan money to small businesses unless they obtain some form of government guarantees. The is an irony here. If businesses cannot easily access money to help create jobs, the economy will remain stagnant and banks don’t benefit from stagnant economies!

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The Banking Function Banks are in business to make money. They do so simply by using other people’s money, which they can obtain at a low rate of interest, and then lend it to other people at a higher rate of interest.

What is a Fiat Currency? No! It’s got nothing to do with automobiles! Actually, Wikipedia has a great definition. The term is derived from the Latin “fiat” which means “let it be done” or “it shall be [money].” Essentially, money is created by government decree. The first fiat money was used in 11th century China. Much more recently, in 1971, after President Nixon disallowed the convertibility of the United States Dollar into gold, the U.S. Dollar together with all other world currencies have basically become “fiat currencies.” In plain speak, the government takes a piece of paper, prints the head of a president, prime minister, monarch, whatever, on it and decrees that this piece of paper is worth so many dollars; pounds sterling, euros etc. You can no longer go to the government and demand a certain amount of gold in return for your paper currency.

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Floating Exchange Rates After the collapse of Bretton Woods, many countries allowed their currencies to float freely in value: while others remained pegged to the U.S. dollar.

The Concept of a Reserve Currency A “Reserve Currency” is generally regarded as one that is stable and can be used to price goods and commodities. Obviously, the U.S. Dollar is today's major reserve currency since, gold, silver, oil and most other major commodities are quoted in the greenback. It is also used by banks to pay off international debts or to influence the foreign exchange rates of their currencies. In other words, if you are in Japan or Europe, you would have to convert your Yen or Euro into U.S. Dollars in order to buy gold on an American Exchange. With the horrendous debt of the United States, there is much talk about creating alternative reserve currencies. For example, several major oil producing states in the Middle East would like to create a reserve currency based on the price of oil. Russia and China would like to disentangle themselves from having the greenback as a reserve currency.

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A Futile Call for the Return of the Gold Standard A number of people, including former U.S. President Regan, have called for a return to the Gold Standard. They argued that it would help prevent politicians from the willy nilly printing of more and more mountains of fiat paper money and would thereby restore some discipline to the budgetary process. The challenge would be to establish a price for gold. If it is set too high, the U.S. Treasury could be faced with truck loads of gold being dumped on its doorstep, asking to be converted into paper money. If the price was set too low, the Treasury could quickly be depleted of its stash of gold bars. There’s another problem. As pointed out in a September 14, 2011 article by Alix Steel in The Street, in order to cover U.S. dollars in circulation in the form of bills, savings, deposits etc., (the “M2 money supply”) gold would have to sell at $35,000 an ounce. This, in spite of the fact that the U.S. Government is already the largest single holder of gold in the world with 8,133 tons of the stuff stashed away at Fort Knox! In spite of this, it would also have to purchase additional gold every second of the day to fund its voracious debt. As you can see, the system is already out of control and any return to a gold standard is impractical at this late stage of the game. The alternative, would be to establish a two-tier currency; one based on the current greenback and another with paper notes that can be converted into gold.

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Ironically, free market forces have already created a pseudo gold-based currency in the form of physical gold Exchange Traded Funds (ETFs) which trade like shares on a stock market but whose price tracks the price of gold and are backed by gold holdings held in a vault. I have to point out that even though you cannot use a share in an ETF to purchase your groceries, it represents a small baby step in the direction of creating a currency based on the price of gold.

The Advent of a Two-Tier Gold Price A few years prior to the collapse of the Bretton Woods accord, a two-tier pricing system emerged. One was set at $35.00 per troy ounce for transactions between central banks and the other was a free floating rate based on market supply and demand. Actually, the demand was so great that in 1968, the London Gold Market had to be closed for two weeks because of the ensuing rush into gold. As I mentioned previously, three years later, President Nixon prohibited the United States from converting foreign owned U.S. dollars into gold causing the collapse of the Bretton Woods accord.

The Devaluation of the U.S. Dollar Accompanying the American Government’s refusal to convert its paper currency into gold, the paper dollar was devalued in 1971 by repricing its value in gold from $35.00 per ounce to $38.00 per ounce. A further

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devaluation took place in 1973 when the “official price of gold” was set at $42.22 per ounce. The U.S. Dollar came under intense selling pressure and later in 1973, major currencies were allowed to float freely. Meanwhile, the free market price in London had shot up to more than $120 per ounce.

The Legalisation of Private Individual Gold Holdings At the end of 1974, American citizens were allowed to own gold in forms other than jewellery. In 2004, the Chinese Government permitted its citizens to buy gold and further encouraged them in 2011, by making it easier for its citizens to buy and hold gold with their banks.

A Comparison Between Bitcoins and Gold Actually, I think there are lessons to be learned from gold as a currency. Gold can be mined and the company mining the gold essentially “creates” money in the form of bullion which is then sold on a bullion exchange. The same is true for bitcoins. They are “mined” and the miner creates virtual digital currency. As many of the world’s major gold deposits have already been discovered and exploited, the mining industry is being forced to extract lower grades of the metal. They are also being forced to operate in less accessible places and in countries where resource nationalism is chipping away at their profits. 101

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Bitcoins also become more expensive to mine in terms of the cost of electricity and computing power. So, as a very broad generalization, the costs to mine gold and the cost to mine bitcoins is on the increase. As a consequence, their value based on their cost to produce is constantly moving upward. Of course, things don’t go up in a straight line as any investor in gold during 2013 can tell you to their chagrin! But, that does not stop the overall long-term trend from being upwards.

A Comparison Between Bitcoins and Fiat Currencies As I discussed earlier, fiat currencies are created by government decree. The paper currencies are basically fancy designs on pieces of worthless paper. Their supply can be increased at the whim of governments and weak-kneed politicians. Bitcoins, while they don’t have any intrinsic value since they are created by using secret computer code, do have a value in their scarcity. A maximum of only 21 million can be created. Governments cannot switch on the printing presses and flood the market with mountains of bitcoins. Therein lies much of their strength as an enduring currency. In my humble opinion, this is an interesting thought worth exploring.

If Central Banksters are Short of Money: What do they Do? They have a simple solution: print more! 102

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Banksters are Almost Universally Disliked It seems to me that a universal hatred has developed for banksters. Some 300 years ago, highway robbery men were dragged from their high horses and strung up for their crimes. Now, they prance around the financial capitals of the world in pin-striped suits and pose as banksters...the guys who engineered zero-down-payment variable mortgages, developed credit default swaps and combined them into derivatives which were anointed by corrupt credit agencies as being high quality debt. In the aftermath of the 2008 financial crisis, the regulators finally woke up to the fact that they were asleep at the wheel and in retribution they slapped some fairly hefty fines on the perpetrators; however very little of that money has perculated down to the real victims of the abuse, since it was maintained that they were adults who should have been able to read all the pages of fine print on their agreements and should not have succumbed to the weasel speak of high pressure real estate salespeople and mortgage lenders. What I really find distressing is that, while the fines ran into the million and billions, there were no admissions of guilt by the banksters who perpetrated these outrages and they basically walked free. Very few, if any of them have been thrown in jail. 103

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What was a much greater affront, was the lavish bonuses they paid themselves while their ultimate victims with underwater mortgages were struggling to keep their homes, their jobs and put bread on the table.

The Banksters in Cyprus Seize Depositors’ Money Probably, the greatest outrage of the last few years occurred in July 2013, when the Central Bank of Cyprus was forced by European and other regulators to seize 47.5% of deposits over 100,000 euros held by businesses and residents in commercial banks and convert the funds into equity to support the Central Bank, whose major folly had been to invest in Greek government bonds. How would you like it if you wandered down to your local bankster only to find the establishment closed and with a notice on the door telling you that they will be seizing close to one-half of the money in your accounts to pay for some national screw up which wasn’t your fault?

The Events in Cyprus Poured a Cold Chill Over Bank Depositors in the PIIGS of Europe Of course there are suspicions that Cypriots were the victims of German Chancellor Merkel’s bid for re-election and an effort by her to demonstrate to her electorate that those who owed money should pay dearly and that the German people were not going to bail them out.

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Well, it certainly put a chill down the backs of bank depositors in the shaky economies of the PIIGS: Portugal, Ireland, Italy,Greece and Spain. From what I can gather, substantial amounts of Euros fled those countries in order to be deposited in new accounts opened with German banks.

The Banksters’ Scandals Go On In 2012, the CEO of Barclays, Britain’s second largest bank, was forced to resign over the Libor Scandal in which inter-bank lending rates were fixed. At the time of writing, investigations were ongoing into the manipulation of commodity markets, especially trading in copper, gold and silver by major banksters.

Bitcoin Rises on a Lack of Trust in Banksters Against this background, is it any wonder that the public has very little confidence in them? All the way from chatter at upper crust cocktail parties to chants at Occupy Wall Street events, banksters are becoming universally reviled. It is ironical that when an unregulated, decentralized virtual cryptocurrency bursts onto the world stage, that suddenly upper crust cocktailers and Wall Street occupiers find themselves awkwardly united in their views: that banksters have been gouging and gaming the system for far too long and its time for a new democratic world currency to emerge.

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On January 6, 2014, Bloomberg conducted an interview with David Woo, head of global rates and currencies at Bank of America’s Merrill Lynch unit. He felt that there was a “social dimension” to bitcoins because many people are suspicious of banks and of the Federal Reserve’s easy money policy. He said: “Bitcoin rises on the back of unease about unconventional monetary policy and about banks.”

Why Bitcoin Gives Central Banksters the Heebie-Jeebies If you have an Internet connection, you can move bitcoins from any point in the world to any other point in a very short space of time and at very little cost. Commercial banksters can be bypassed and lose out on all the lucrative transfer fees. At a higher level, bitcoins can threaten a state’s monopoly on controlling its money supply. There is no central database. There is no central authority. And, yikes, no government oversight by regulators! Let’s face it. If the U.S. Government is short of cash, Congress will simply allow (maybe with some wrangling) more money to be printed. I would be in monetary heaven, if I could turn on a printing press and create more cash every time I needed it. But..the U.S. Treasury can’t print bitcoins! Bitcoins are outside of their realm. Central Banksters have pathetically little control over them and that gives them the heebie-jeebies.

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Helicopter Ben, Janet Yellen and Tsar Putin Former Fed Chairman Bernanke gained fame (or notoriety) when he said that, if necessary, he would go up in a helicopter and throw out bags of money to stimulate the U.S. economy. In turn, this statement earned him the derisive nickname of “Helicopter Ben.” Now that he has retired and his helicopter has been relegated to the junkyard of financial lore, the question is whether his successor, Janet Yellen, will be forced to dash down to her local heliport and hire her own helicopter. The trouble is that she is likely to require the services of the most powerful helicopter in the world since she may have to load it with a terrifying number of bags containing fiat cash. The irony is that the world’s most powerful helicopter is the Russian-made Mi-26. Will she have to go on bended knee to Tsar Putin to seek permission to rent one?

The U.S. Fiat Money Printing Press In my view, under Helicopter Ben’s Quantitive Easing (QE) 3, the Fed has simply been buying back U.S. Government 10-year bonds with “cash” it has created in an effort to keep medium-term interest rates down. (Incidently, with little benefit to businesses and entrepreneurs who create jobs in the “real economy.”) Meanwhile the Fed’s balance sheet has bloated to almost $4 trillion. Of course, in 10 years (give or take a few years) the Fed will get its money back because the U.S. Government will pay them when the bonds mature. So, what will happen if the Government doesn’t have the money to pay the Fed? Simple, it will just print more!

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Bitcoins Could Keep Governments Respectable! What would happen if a foreign creditor lost trust in the U.S. Dollar and asked for repayment in bitcoins? The whole financial world would fall apart in less time than it takes to say “Bitcoin.” The United States isn’t the only country playing this game. The Japanese have been at it for well over 10 years; the Brits have been playing it and even the European Central Bank has joined in the fun. And, none of these have control over bitcoins. Bitcoins can be transferred on a peer-to-peer basis over the Internet; outside of the existing centralized and monitored banking apparatus. That’s very scary to banksters! It’s even much more scary to their bosses: the central banksters! So, what will central banksters and their proxies do? They will attempt to regulate!

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Bitcoins as the “Esparanto of Commerce and Investing” Before I delve into the role of Bitcoins as a world virtual cryptocurrency which can be traded or exchanged by people of different races, cultures and languages, it may be useful to look back at another, supposedly world-wide human creation and that was Esperanto, which was designed as a universal language for our tiny planet. Esperanto has become a footnote in linguistic textbooks since its debut in 1887. It was created as a universal language where citizens of the world could shrug off their Towers of Babel and babble in the same language. Indeed, they might actually have been able to understand one another! Estimates of the number of users vary in a wide range from 100,000 to 2 million. Regardless, these numbers are still a small drop in the bucket compared with the current world population of 7 billion. Well, Esparanto has gone off like a wet squib. English is spoken by 1.5 to 1.8 billion worldwide. The world’s populace clamoured to learn English or dare I say “American” in order to trade and make money! In fairness, Chinese Mandarin and Indonesian Malay are spoken by a greater number of people worldwide.

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For a while, the Church may have had modest success by continuing with Latin although many lost their lives daring to challenge it. At least ecclesiasticals from around the world could (and still do) communicate with one another in that ancient tongue, even though common plebeians haven’t got the foggiest idea of what they are talking about. Indeed, after a year at primary school (by the by I can still recite them) I question its role as a world language except by some ecclesiastical thoroughbreds who still believe it could be a stepping stone to everlasting salvation. On reflection, bitcoins could become the ultimate “Esparanto currency” of the world for e-commerce, investing, trading and saving. Maybe bitcoins could escape the lackluster acceptance of Esperanto as a worldwide language and become a frictionless peer-to-peer method of creating, exchanging, trading and saving in the virtual world. They spell freedom from the clutches of much despised commercial banksters; their conniving central banksters, meddling bureaucrats and even jawboning politicians. Bitcoins could develop into a free world currency which everyone understands and can communicate and do business with on their terms...and in their own language...and in an unregulated environment. Oh, only if that could be true!

Could Bitcoin be an Antidote for Inflation? When a country’s economy goes to the dogs, there is a danger that inflation will set in. Examples of this, at the time of writing, are Iran; buckling under the yoke of international sanctions and Argentina, where socialist government bungling has brought the nation’s economy to its knees.

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When workers in these counties get paid in local paper fiat money, they are best advised to rush out and spend it. If the price of a loaf of bread today doubles in price by tomorrow, obviously folks will buy their bread today. The German Reichsmark suffered hyperinflation and collapsed in 1923 during the Weimar Republic and created an environment where Hitler was eventually able to seize power. In order to mitigate the risk of hyperinflation, local citizens could purchase gold on the basis that its value is quoted in an outside currency and could be converted into that currency. The same reasoning would apply to Bitcoin since it is an international cryptocurrency; convertible into various fiat currencies around the world. In reality, this argument holds true even if you remove the “hyper” because any form of inflation erodes the underpinnings of wealth in a nation. Even at an annual inflation rate of 2%, a hundred bucks today will only have the purchasing power of ninety eight bucks next year. Like gold, Bitcoin could be an antidote for inflation. The challenge is being able to buy bitcoins in a country such as hyperinflating Argentina, where strict capital controls have been put into place to prevent the transfer of wealth to more stable jurisdictions.

Could Bitcoin be an Antidote for Currency Devaluations? On the surface, the answer would appear to be “yes.” But, when you dig deeper there are challenges to this idea. 111

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At the time of writing, both the Turkish Lira and the Argentine Peso had just been devalued. In the case of Turkey’s 30% devaluation, it was due to internal turbulence; corruption charges against politicians and a general lack of confidence in the country. In the case of Argentina, the cause has been gross mismanagement of the economy by its left wing socialist government following default on some of its government bonds back in 2002. These aren’t the only nations whose currencies are under pressure. The South African Rand has fallen out of the sky in the wake of labour unrest and strikes at the country’s platinum and gold mines. Such devaluations are inflationary by nature. Imports, such as oil, cost more. Foreign travel becomes cost-prohibitive. As the currencies sink, interest rates are increased in an effort to attract foreign capital and stop the decline, but higher interest rates hurt the local economies and make goods and services more expensive.

Could Bitcoin Develop into a Universal World Cryptocurrency? If Bitcoin was a world cryptocurrency, then theoretically these devaluations would not be necessary but nations would immediately fall prey to the “Euro Trap” as in the current scenario, where the peripheral PIIGS are struggling and are unable to devalue their local currencies in order to become more competitive and dig themselves out of the holes that they have self-inflicted 112

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upon themselves. The only thing they can do is to lower wages in Euros, cut public sector jobs and sell their goods and services at lower prices in terms of Euros and such moves are very painful and politically unpopular to the point that insurrection may not be far round the corner. Youth unemployment in Spain, Greece and Portugal is close to 50% and mix that with older people who have lost their jobs and have no safety net to fall back on and you have a tinderbox where right-wing extremism is spawning local Nazism at an alarming rate. All of this puts the kibosh to the idea that Bitcoin could become accepted as a universal world cryptocurrency and lead to the abolishment of local fiat currencies. In spite of that, I still think that it’s an entertaining thought so long as the concept behind it is regarded as a work in progress!

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Can the Good Guys Quell the Upstart Rebellion in Bitcoinland? Regulators have been caught with their digital pants down. At the time of writing it appeared that many were unsure of how to deal with this rapidly growing rebellion against fiat currencies. After all, the whole existence of regulators is dependent on their ability to regulate. It’s their raison d’être. Suddenly they find themselves impotent to regulate a cryptocurrency which transcends their legal borders. The regulators have three big guns in their arsenal and commercial banksters are all to happy to draw regulators’ attention to them since its in their vested interest to see this digital cryptocurrencey eradicated from planet Earth before it undercuts the revenue streams they spent years building on the back of fiat currencies. These three big guns are based on fear. • •

The fear of money laundering. The fear of financing terrorism.

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•

The fear that bitcoins could be used for the purchase of narcotics, or to finance illegal activities.

Add to this, is the fear factor that Bitcoin is a virtual cryptocurrency which transcends national borders and has no centralized organization; let alone a legal office address where government spoofs can descend with search warrants, incitements and subpoenas. Bitcoin cannot be summoned to testify at congressional hearings and be subjected to the barbs of dysfunctional lawmakers. It does not even have to plead the Fifth Amendment because it exists exclusively in the cloud; outside of the jurisdiction of earthly lawmakers.

Don’t Worry! The American Lobbyocracy will Leap into Action National borders be damned! The 5,000 plus army of bankster lobbyists will be roused from their K Street hideouts and swoop down on the small 500+ strong outpost of lawmakers who occupy the American Congress. There, they will put their magic to work with lavish lunches, promises of campaign contributions and a whole plethora of goodies to assist lawmakers in seeing the cryptocurrency threat from a bankster’s viewpoint. Lawmakers will be outnumbered ten to one and will almost surely capitulate, as they usually do. Democracy be damned! Lawmakers will be pressured to strong-arm their allies around the world to fight this “cryptocurrency terrorism” which threatens to overturn their fiat currency applecarts. 115

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The National Security Agency will be directed to tap the phone conversations and private e-mails of cryptocurrency terrorists from around the world in order to eradicate them before they make the international banking system more efficient, less costly and much more secure!

Could the Possession of Bitcoins be Made Illegal? Don’t laugh! Within living memory, during the reign of President Roosevelt, it was illegal to own gold other than in the form of jewellery. It was also illegal to mine gold. So, it is not too far a stretch of the imagination to conjure up a time when the possession and mining of bitcoins would be against the law. Could you imagine a Bitcoin miner being sentenced to 150 years like Ponzi King Madoff? Of course, the American justice system has a delightfully perverted sense of humour, so maybe the Bitcoin miner might get five years off his or her sentence for good behaviour!

Reality Check! Can the Good Guys with Guns Force the Bitcoin Genie Back into Its Bottle? It’s doubtful that brute force will be able to achieve anything. To use Homeland Security parlance, bitcoins are an “asymmetric enemy.” They can strike at fiat currency targets with impunity anywhere in the world. 116

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Excluding countries within the former USSR, after World War II, the U.S. could snap its fingers and most world governments would click their heels and fall into line. This is no longer the case. Many of the tin pot dictators who supported U.S. policies in the Philippines, Panama and various other countries were discarded after they were no longer useful in combatting the communist threat. Gradually, the U.S. has found itself in a world of countries that no longer pander to its every whim. So, unless every country in the world toes the line, bitcoins will be able to survive as a global currency. Who knows, the Cubans, the Venezuelans, the Bolivians, the Iranians and a whole list of others might just find it an enjoyable way to stick their fingers in the eye of a declining world superpower. In other words, so long as there are countries which are willing to defy the role of the U.S. dollar as the world’s fiat reserve currency, Bitcoin’s survival will be guaranteed, because it will be impossible to completely eradicate, unless the Internet is shut down and people are imprisoned within their national borders. The Bitcoin genie is out of the bottle and no one is going to be able to force it back; but they will be able to clip its wings.

The Chinese Found a Way Earlier in 2013, Chinese citizens had a love-in with bitcoins. They could purchase things with impunity. They could purchase things anonymously.

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They could move money out of the country without government permission and this was Bitcoin’s undoing. Under a totalitarian regime which censors freedom of expression–remember news coverage of Pope John Paul’s funeral was banned. The state has decreed that appointments of Catholic bishops must be approved by the communist government. News censorship made sure that news of the Arab Spring was kept out in case the Chinese people would rise against the powerful ruling elite and corrupt officials who gain personal wealth at the expense of the wider population. It’s difficult to get hard facts but in 2011, The New York Times came up with an estimated 180,000 “mass incidents” that had occurred the previous year. These included sit-ins, strikes, rallies and violent clashes. As the rich get richer at the expense of the poor, it’s not hard to imagine a day when a coordinated mass rebellion could occur and the government’s response could make the Tiananmen Square massacre look like a Teddy Bears’ picnic party. It’s easy to get swept away with news of American car makers achieving record growth numbers in China. American multinationals have been suckered into exporting American jobs to China in a bid to reduce costs of production. Of course, the Chinese welcome foreign suckers who will help boost their economic growth. But try and get money out of China. Suddenly, you are confronted with a wall of currency controls. I know from personal experience. A number of years ago one of my books was translated into Mandarin and published in China by one of the provincial communist state-run book publishers. At this point I should explain that Chinese locals cannot start up their own publishing 118

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businesses. There is only one publisher allowed per province and that is communist controlled. Needless to say that newspapers, radio and TV stations are under the strict control of the communist party. For the communist controlled publisher of my book, the advance royalty in U.S. dollars had to be approved by the central government. It took quite some time but eventually the money arrived. Put another way, capital controls prevent the ordinary Chinese citizen from investing in foreign assets. This may have been part of the reason Bitcoin took off in China early in 2013 and became the world’s biggest trader in bitcoins, according to a December 5, 2013 report in Bloomberg. At first, it may have appeared innocent enough. Loyal citizens could use bitcoins to purchase an endless array of electronic goods. But, bitcoins are also an international currency and funds could suddenly leap across international borders and money would leak out here, there and everywhere; with transfers being made almost instantaneously and anonymously. Even worse for the communist kleptocrats, wealth could be transferred out of the country without official government knowledge or government approval. Control was lost! The Chinese government found a simple way to plug the holes. It banned bitcoin exchanges! In early December 2013, the People’s Bank of China banned the buying and selling of bitcoins by Bitcoin exchanges and banks. It did not prevent citizens from owning bitcoins or trading with them but who can do either if they cannot be exchanged for the local currency.

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To put a self-righteous face on it, it was claimed that this draconian measure would prevent money laundering, when in practice it was preventing some hard working sod from moving legally earned money out of the country. Also, Chinese won’t be able to take a “vacation” and stuff their suitcases with paper Yuan Renminbi and try to convert them at a foreign bit exchange. Who is going to accept the fiat currency? Now if they leave with some gold bars stashed in their suitcases under their socks and underwear, they might have better luck!

Central Banksters Perceive Bitcoins as a Threat to Their Fiat Currencies I can understand countries with strict currency controls getting their nickers in a knot over a free flowing, borderless cryptocurrency. It is less obvious why countries with open currency borders would get upset. I can only assume that part of it is due to the impotence of regulators to regulate. What does a regulator do in the morning when he or she comes to work and they have nothing to regulate?

National Security Poses the Biggest Threat to Cryptocurrencies What would the reaction be if the government “leaked” that Al Qaeda funders (in the U.S. or elsewhere) were secretly using bitcoins to forward donations to fund terrorist activities? Regardless of whether such allegations 120

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were true or not, I am sure the National Security Agency, the Department of Homeland Security, the CIA, the FBI, the Department of Defence, the Treasury Department, etc., would come down on Bitcoinlanders like a ton of bricks. Meanwhile, banksters would celebrate and fall over themselves with assurances to their customers that the homeland will be safe...so long as they co-operate in eradicating this threat to the fiat currency that forms the foundations for their business!

Could a “Green List” for Bitcoin Validation be the Answer? There is one way that Bitcoinlanders could sidestep the potential wrath of the U.S. Government and that is to unmask the anonymity that bitcoins provide by linking their owners to an actual e-mail address. A new company by the name of Coin Validation proposes to offer such a voluntary method through which owners of bitcoins would undergo a kind of due diligence to ensure that they are not criminals, terrorists or other undesirables. The bitcoins which they own would then be placed on a “green list” which shows that they have been cleansed. This concept has set off a firestorm of protest in the Bitcoinlander community which are proud of the anonymity which the ownership of bitcoins offers. They also fear that a double standard could develop with green bitcoins which have been cleansed commanding a higher value than those which have not. Such an idea would also destroy the decentralized nature of bitcoins and bring “green bitcoins” under some kind of centralized control. Thus far, there has been no official reaction from the U.S. Internal Revenue Service (IRS) but no doubt they are intrigued with the possibility of 121

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containing the bitcoin mania; putting Bitcoinlanders on a tight leash. Going out on its own, in November 2013, the New York State Department of Financial Services proposed that all Bitcoin businesses operating within the State should be required to obtain a BitLicence; a little bit like a dog licence. Of course, such a move would require a bureaucracy to administer; a “BitPolice” to enforce, and “BitJails” to incarcerate “BitOffenders” Then, joy of all joys, a “BitTax” would probably have to be levied to pay for all this government intervention. Actually, New York isn’t the only state which has placed hurdles in the way of Bitcoin exchanges. At the federal level, companies have to be compliant with being a Money Services Business (MSB) however, various states have jumped onto the bandwagon and require MSB compliance at their state levels as well. Of course, these rules place more hurdles for U.S. Bitcoinlanders who want to operate exchanges across the nation. One big advantage that Bitcoinlanders have is that the universe is their playground, so long as they can connect to the Internet. Also, many Bitcoinlanders operate their businesses in cyberspace, so if things get too hot in one jurisdiction, they can simply thumb their noses at the offending regulators and move elsewhere. But...hold your horses! That may not be as simple as it sounds.

The Tentacles of U.S. Regulators Extend Far Beyond their Borders It may not be quite so easy for all Bitcoinlanders to thumb their noses at U.S. regulators. Some may get ensnared in the long tentacles of U.S. law. 122

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A sneaky clause in the U.S. Foreign Account Compliance Act forces U.S. based banks to withhold 30% of transfers sent to international institutions outside of the U.S. if they do not comply with U.S. law. So, if a Bitcoinlander needs fiat money transferred from the United States in order to conduct business, only 70% of the funds will be accessible. Not only that, such a Bitcoinlander could face arrest on entering the United States if it is deemed that U.S. law is not being complied with. On the other hand, if no fiat money transfers are needed, the Bitcoinlander can proudly thumb his or her nose.

Compliance under the U.S. Financial Crimes Enforcement Network (FinCEN) The Financial Crimes Enforcement Network (FinCEN) operates under the U.S. Treasury Department. In March 2013, it issued a number of guidelines that cover bitcoins. They contained some good news and some bad news. First, the good news is that mining for bitcoins for one’s own purposes is not to be considered the transfer of money and as such no registration is required. The bad news is that the transfer of money does require that Bitcoin exchanges register. The even worse news is that those operating in the U.S. will have to post surety bonds costing $100,000 annually. On top of that, they will be required to have anti-money laundering policies in place. It is interesting that Canada has not toed FinCEN’s line and had previously explicitly stated that exchanges in that country do not have to meet these 123

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requirements, however, that situation may change as a result of comments made in the February 2014 Federal Budget. For the most part, the Europeans have also taken a more laissez faire attitude. One exception is Denmark, which has announced that it wants to amend existing financial legislation to encompass Bitcoin exchanges. Another exception is Norway which announced in December 2013 that it would not recognize bitcoins as legal tender and a capital tax would be applied. These different regulatory regimes could lead to Bitcoin exchanges becoming decentralized; with bitcoin exchanges in different countries or cities, which could bode well for their ultimate survival. Exchanges could also migrate to more welcoming jurisdictions.

The Dutch Thumb Their Noses at Bitcoin Regulation The Netherlands have decided to chart their own course in Bitland. The government allows anyone with an account at a Dutch bank to purchase bitcoins online and in real time. No registration is required and bitcoins can then be stored on a mobile device. This move has helped transform Amsterdam into a Bitcoin Mecca. New startups are popping up and BitPay, which I spoke of earlier, has chosen that city in which to locate its European headquarters.

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An Ominous Sign: Apple Removes Bitcoin Apps Early in 2014, Apple quietly removed all Bitcoin-related apps from its stores. There has been speculation as to whether this was due to pressure from regulators, concerns about legal exposure or to conjecture that Apple would introduce its own version of a digital cryptocurrency. All of these possibilities are ominous signs that trouble may be brewing for Bitcoin.

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Bubbles are Driven by Greed I don't need to tell you about the dot com bubble which lasted from 1995 to 2000 and involved speculation in technology companies, many of which had no earnings and probably never had any prospect of earning a dime. Needless to say that when the bubble burst, it caused an almighty stock market crash. In the more recent sub-prime real estate bubble, adjustable rate mortgages offered to millions of Americans (from 2004 to 2007) with poor credit ratings were then bundled (“securitized”) and sold with high credit ratings to financial institutions. When the initial low rate mortgages reset to higher rates, many people were unable to afford them; had their homes foreclosed and this also left many financial institutions holding mortgages that had gone sour. In turn, these financial institutions ran into difficulties and, when Lehman Bros. collapsed, it almost brought down the entire banking system in the developed world. As you know, the stock market crashed and the economy went into a tailspin as credit for business seized up. There have been many bubbles in the past and if you want to know more about them I would highly recommend that you read a book by Charles Mackay which was first published in 1841. Yes, that's not a typo: it’s 1841. It is entitled Extraordinary Popular Delusions & the Madness of Crowds. In 126

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it he describes the Dutch Tulip Mania of the early 17th century when some tulip bulbs were bid up to insanely high prices. He also wrote about the excessively wild speculation in the South Sea Company which traded with South America in the 18th century and which ruined many fortunes when the bubble eventually burst.

Precious Metal Bubbles Other bubbles have burst. It happened to silver after the Hunt brothers attempted to corner the market and their scheme unravelled. It happened in 1324 AD when the ruler of the Mali Empire in West Africa was making his way to Mecca on the haij pilgrimage. His camel train was laden with so much gold from his homeland that when he stopped over in Cairo, he spent so much of it that it depressed the price for the next ten years! More recently, billionaire George Soros, called gold the “ultimate asset bubble” and cut his holdings in the metal by 99%. Many (including myself) disagreed to our chagrin. At the time of writing, I personally think that a lot of air has been let out of the bubble but much as it hurts me to say, I feel that it’s far from bursting. When your cab driver, hair dresser and “in-people” at cocktail parties can only talk about gold–then is the time to watch out! I don't think we are quite there yet, although stock promoters are already working the phones from their bucket shops in Switzerland and British Columbia as I have found out for myself when I received a couple of unsolicited phone calls.

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When it comes to bitcoins, my hair dresser hasn’t heard about them; I have yet to hear a cab driver mention them and they don’t seem to be a topic of “cocktail speak”...at least not yet!

Greenspan’s Bitcoin “Bubble” You'll probably recollect that the former chairman of the Federal Reserve Board, Alan Greenspan, used the term “irrational exuberance” in a 1996 speech to the American Enterprise Institute and this became the most famous quote out of all the millions of words which he uttered during his tenure. He used the term to warn of excessive valuations given to technology companies prior to the bursting of the dot-com bubble. In that sense, history shows that he was correct. Unfortunately, he didn’t have the same insight into the lead up to the U.S. sub-prime mortgage bubble. In his latest ephiphany, the retired Fed Chairman declared that bitcoins are a “bubble.” Is he right? I’ll let you be the judge of that! Do I accept bitcoins as payment for buying my books? Not yet...but maybe in the future!

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Bitcoins Aren’t the Only Cryptocurrency Bitcoin isn’t the only player in the Cryptocurrency universe. There are several contenders.

Namecoin Namecoin is somewhat similar to Bitcoin insofar as it uses an identical method of cryptography and similarly, will be limited to the creation of a maximum of 21 million units. It differs in the way in which the currency is created by using a whole series of domain names rather than hash tags. Essentially, it is an unregulated domain name system complete with its own e-mail and log-in system. Since it is unregulated, like Bitcoin, it escapes any form of government control and critics point out that it could develop into a haven for illegal and criminal activities. At the time of writing the price of a Namecoin was around $8 USD.

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Litecoin Litecoin uses a cryptocurrency somewhat similar to Bitcoin’s but with four times as many coins that can be created; with slightly over 25 million being available at the time of writing. The larger number has the advantage that it can be traded at a faster speed. The downside is that Bitcoin has grabbed most of the market share and Litecoin has largely been left in the dust, however, it is far easier to mine. Another disadvantage is that, compared to Bitcoin, far fewer merchants are accepting Litecoin. Also, its reputation has been tarnished with accusations of black market transactions involving stolen credit card data from Target. At the time of writing, Litecoins were selling for around $30 USD each, however, they cannot be purchased directly in U.S. dollars with the result that the price has become linked to that of bitcoins.

Feathercoin Feathercoin is digital cryptocurrency which is similar in nature to Bitcoin and Litecoin. Feathercoins are available for purchase in the U.K. by means of bank transfers through a business with the delightful name of Bittylicious.

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Peercoin or PPCoin Peercoins use much less computing power than bitcoins in their creation and hence have been referred to as “environmentally friendly.”The creator, Sunny King, has incorporated a transaction fee and also permitted a 1% per annum increase in the number of coins held each year. In other words, if you possess 100 Peercoins, you will end up with 101 after a year which of course increases the total number that will be issued. Like Bitcoin, the total supply is limited to 21 million. Peercoins operate in a centrally controlled system and at the time of writing were worth about $6 USD. Again, the major disadvantage is that it has gained only limited acceptance as a cryptocurrency.

Primecoin In July 2013 Peercoin’s creator, Sunny King, pulled another cryptocurrency rabbit out of his digital hat; namely Primecoin. This has since developed into the world’s 10th-largest cryptocurrency. I must confess I wasn’t able to find out a great deal about Primecoin, so I’ll fall back on Wikipedia’s description. It describes it as a peer-to-peer open source cryptocurrency that implements a scientific computing proof-of-work system which searches for chains of prime numbers.

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Primecoin shares much of the source code and technical implementation of Bitcoin and is distributed under a conditional software license. The Primecoin protocol's target rate is one new block per minute, so Primecoin blocks are generated 10 times as fast as Bitcoin’s blocks on average, and Primecoin transactions are confirmed approximately 10 times as fast.

Mastercoin Mastercoin was created by J.R. Wallet and is designed as an opensource software which will allow anyone “to design and release their own currency or tokens, with their own rules without doing any software development.” I must admit I am fascinated at the possibility of starting my own currency! In simplistic terms, it will allow anyone to exchange their bitcoins for mastercoins. In essence, it draws on the information already contained in the bitcoin blockchain and interprets it in a different way. These mastercoins can, in turn, be used to trade in a certain commodity or service. Theoretically, they could be used for trading shares in a company (obviously those not listed on a recognized exchange) or for exchanging deeds or parts of deeds. I have to admit that I find the whole concept a little gimmicky but I am sure that some applications will evolve that will make some sense in the real world. If you want to learn more, I would encourage you to visit: www.mastercoin.org.

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Clinkle Clinkle isn’t actually a cryptocurrency, (although it has been mistaken as being one) but rather a dynamic currency conversion system or app. The folks at Clinkle insist that it is not built on top of Bitcoin. They say “Clinkle balances are essentially stored value cards held in escrow.” Clinkle emerged from StartX, a non-profit business incubator associated with Stanford University, and managed to raise a cool $25 million from a “Who’s Who” list of Silicon Valley nerds. In spite of all the hype it has generated, Clinkle was not available as a product or a service at the time of writing. It’s release date is expected sometime during 2014.

Ripple Ripple is not a bona fide cryptocurrency but rather a method of raising money for charities. Visitors to their site, www.ripple.org, are shown some advertisements. By clicking on one of them, a one to twenty cent donation is generated which goes to a charity and according to their Web site 100% of the funds are donated.

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Give-Me-COINS: a Virtual Currency Mining Pool A number of these cryptocurrencies involve giving payouts to successful miners. This is were Give-Me-COINS steps in. It basically acts as a virtual pool which makes payouts to successful miners of the following: • • •

Bitcoin Litecoin Feathercoin

It does not appear to be perfect because a successful hacker emptied several Litecoin accounts in January 2014 and withdrawls were temporarily suspended in order to prevent any further theft.

Early Adopters Have an Advantage With most cryptocurrencies the creators and early adopters have a considerable advantage in being able to feather their own nests before Joe Bloggs Public gets involved. Is this fair? Actually, if you examine our capitalistic society, early “adopters” usually do have an advantage. The entrepreneur who slaves away in his or her basement to create a super widget is the one who often stands to make the most if the product takes off. Equally well, the financial angels and venture capitalists who help it along the way often stand to gain as well. When it becomes objectionable is when some big bully comes in and steals the super widget, claims it to be his own and then sails off into the sunset with a boatload of gold. 134

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Off-Planet Banking “Off-Planet Banking” was a term coined by London School of Economics Professor, Ian Angell, when he was examining the future of money. He pointed out that the fiat currencies and financial instruments which we use today are based on trust and that trust is rapidly eroding. The world is slowly breaking itself out from an antiquated system of national currencies which have the tag line “legal tender.” A gradual denationalization of money is taking place and fiat monies could eventually be replaced by worldwide virtual cryptocurrencies, which can be securely stored on a satellite and, as such, outside of centralized government control.

Are Bitcoins a Virtual Currency? Bitcoins certainly have many of the characteristics of paper fiat currencies. They can be used to purchase goods and services so long as the vendors will accept them. They can be moved across borders electronically but at much less cost and in much less time than traditional money transfers. You can keep your bitcoins in your digital wallet where they might increase or decrease in value relative to fiat currencies. In that sense, they are similar to fiat currency notes which can also increase or decrease in value in your physical wallet. A case in point, if I had purchased U.S. Dollars in Canada 135

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about 6 months before writing this book, they would now be worth about 10% more because of the decline in value of the Canadian Dollar or “Loonie.” Bitcoins are anonymous insofar as nobody need know that you have them The same is true of cash–you can hide it under your mattress and nobody will know you have it. Fiat paper currency notes have serial numbers which identify each note but they do not identify who has previously owned the note. The encryption codes in bitcoins will track the ownership right back to the beginning even though the identities of the owners are anonymous. Herein lies one of the major strengths of bitcoins: they cannot be counterfeited like fiat paper currencies. There is one significant difference. If you entrust your local bankster with your cash and place it in a savings account, it is possible that you may be able to earn a teeny weenie bit of interest so long as you maintain a minimum balance; usually in the thousands. On the other hand, bitcoins in your wallet will earn no interest regardless of how many you have. In that sense, Bitcoin resembles a commodity, like gold. Also, you can lend fiat paper currencies by way of a loan and you could receive interest on the loan. At present, I am not aware of any mechanism which allows you to loan bitcoins and earn interest.

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Are Bitcoins a Virtual Commodity? Bitcoins have many characteristics of commodities such as gold, silver or other precious metals. They are “mined” even though the mining processes are completely different. In both instances, the people who do the mining are the ones who create the “wealth.” There is an expenditure for equipment, time, effort and costs. While there are still many precious metal deposits to be discovered, they are becoming increasingly difficult to locate and the cut-off grades have declined. In general, this has created scarcity and higher prices; if viewed over the longer term. Precious metal miners are faced with increased capital costs for equipment and development as well as higher wages for skilled labour. Meanwhile “resource nationalism” has run amuck where host countries want a bigger pound of flesh from the foreign extractors. Foreign mining companies cannot just get up and leave their holes in the ground when the host country abruptly moves the royalty and taxation goalposts. As I discussed earlier, the mining of bitcoins can become increasingly expensive as time goes by and the “mining” process requires every increasing computer power and electricity for “extraction.” On the other hand the playing field is relatively level and not subject to “resource nationalism” although I am sure that taxation authorities in different jurisdictions may suddenly smell a bonanza. If the goal posts are moved, the solution, unlike for the mining companies, is to pack up computers and relocate in a more tax-friendly jurisdiction.

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Both bitcoins and precious metals can be used to purchase goods or services. While gold sovereigns may be a currency of the past, I am sure that there are many people who would accept ounces of gold as payment. Indeed, a company has already developed a CombiBar which allows you to snap off one gram pieces of gold which could be used as payment for goods and services. Bitcoins and CombiBars offer very attractive alternatives to paper fiat currencies which do not have to be mined. By way of contrast, the government, can at a whim, create more fiat money by turning on the switch of a printing press and so long as its populace is gullible enough to accept that it has a value bestowed upon it, there won’t be turmoil in the land but I fear that a public awakening is on its way! Such an wakening could make commodities such as gold and cryptocurrencies the preferred choice for conducting commerce. In January 2014, Finland’s central bank rejected Bitcoin as a currency and decided to categorize it as a commodity. It also rejected its role as an electronic payment system. The lurking challenge is that the purchase and sale of commodities could become subject to sales taxes such as VAT. The German Iron Chancellor, Merkel, was already skirmishing in mid-2013 (prior to her re-election) with opponents to her proposed financial transactions tax. Fortunately, she was shouted down, however, the danger remains. If, at some stage in the future, bitcoins are deemed to be a commodity and the VAT tax is extended to their purchase and sale, this could spell disaster for the emerging cryptocurrency. They could evade this fate if they are deemed to be legal tender but I feel that hell has a better chance of freezing over before that could happen. 138

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Are Bitcoins Works of Art? According to a Bloomberg report, in January 2014, the Swedish Tax Agency stated that they will probably “View bitcoins as what we call another asset–just like art or antiques.” Of course, the more sinister aspect of this is that capital gains tax could be levied on transactions. The report also said that the Swedish authorities were also looking into treating Bitcoin miners as businesses, which would allow them to deduct expenses such as computer software, hardware and wages on time spend mining.

Will Bitcoins Evolve Into a Payment System? Bitcoins have already developed into a payment system. You can take a fistfull of paper dollars, go to a Bitcoin exchange and purchase bitcoins. You can then use those bitcoins as secure payment to purchase goods or services anywhere in the Bitcoin universe. On the other hand, if you receive payment from the other side of the world, you can go to your exchange and convert them back into fiat paper dollars. If such exchanges were incorporated into the banking system, interbank transfers could be made with ease. Foreign payments and remittences could be made securely, rapidly and at minimal cost.

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Disintermediation Of course, if the banks continue to resist incorporating Bitcoin or some similar cryptocurrency technology into their payment systems, peer-to-peer transfers are likely to continue to evolve outside of the banking system. I am sure that banksters will strongly resist being disintermediated and its in their vested interest to see these technologies flounder.

Could the Possession of Bitcoins be Declared Illegal? As I mentioned earlier in this book, barely 80 years ago, it was illegal to own or mine gold in the United States. During the prohibition of the 1920s and 1930s, liquor was prohibited. It’s happened before, so could it happen again, but this time against the possession of bitcoins? In my view, it would be very challenging to place an outright ban on the possession of bitcoins unless all countries are prepared to shut down the entire Internet, which seems unlikely. On the other hand, indirect attacks seem more likely.

Will Bitcoinlanders Be Forced to Reveal Their True Identities? Unfortunately, I feel that this will be a very likely development. The anonymity of bitcoins enables criminals, terrorists and money-launderers to co-mingle with good, honest law abiding citizens in Bitcoinland. This is 140

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an affront to law enforcement, homeland security, the Treasury Department and a whole other army of government agencies, snoops, departments and regulators. If Bitcoinlanders were forced to provide their legitimate e-mail addresses at the time they transact any business, their true identities could be established. In turn, I am sure Bitcoinlanders will find this is an affront to the whole Bitcoin ecosystem, but in the end, they may be forced to surrender to more powerful forces. It is intriguing to think that some countries may not toe the line and thumb their noses at Uncle Sam and his Organization of Economic Cooperation and Development (OECD) compatriots, much like tax haven jurisdictions.

Will Bitcoinlanders be Digitally Strip-Searched for Activities that are Deemed Illegal? Even if a Bitcoinlander’s legitimacy is established by way of an e-mail address, will Bitcoinlanders be digitally strip-searched every time they go to an exchange and ask for fiat currency in exchange? If they are running a retail business, restaurant, bar or other “cash” business they are unlikely to arouse much suspicion but others probably will. This sort of thing is already happening in the fiat money world. If you dump a load of cash on your bank teller’s desk, you will probably find yourself (secretly) reported to authorities who may take a keen interest in knowing where you obtained it. If you go down to your favourite local caffeine joint and purchase the latest mocha lateé, and pay in bitcoins, will the Department of Homeland Security 141

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be immediately alerted to the possibility that you might be meeting in a public coffee shop with a potential terrorist? Will you be subjected to an electronic strip search to prove your innocence (of course with preauthorised secret FISA court approval)?

Could the Dark Wallet Provide a Solution? The Dark Wallet can exist as an extension of the Internet browsers Firefox and Chrome. It involves a decentralized mixing service so that bitcoin transactions can be mixed up so as to preserve privacy and anonymity. As I pointed out earlier in the FBI inditement of Dread Pirate Roberts: “Silk Road uses a so-called ‘tumbler’ to process Bitcoin transactions.” So far as I can make out, Dark Wallet would simply be another tumbler and from a law enforcement and regulatory viewpoint, I doubt that it would be any more appealing to them than a seaweed and jellyfish sandwich for lunch.

The Rise of Gold and the Collapse of Fiat Currencies The Web site www.usdebtclock.org provides a chilling debt clock for the United States. At the time of writing, it revealed that total U.S. debt stood at a staggering $60.8 trillion with a further $127.5 trillion in unfunded liabilities such as medicare, prescription drugs and liabilities for social security. At some point or other, the government is going to run into a lot of trouble printing paper fiat money. Already, the governments of foreign countries are 142

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becoming increasingly anxious about what is going on. Central bank buying of gold is on the increase. In the last decade, there has certainly been a u-change in the attitude of central banksters around the world insofar as the role of gold is concerned; especially as a “pseudo” reserve currency. It was interesting that when Cyprus recently ran into financial crisis, regulators wanted to force the nation to sell its relatively small holdings of gold, which, in turn, caused a momentary panic in the gold markets. This move was reflective of regulatory double-speak where gold is not officially regarded as “money” and yet it could be used as “money” to pay off debts! The British Government, in a stroke of misguided genius, sold half of its gold reserves between July 1999 and March 2001 at the bottom of the gold market. The average price fetched was $275 per ounce. Compare that with the mid-March 2012 price of about $1,660 and you will see the astounding folly of the British politicos of the day! Even though the price has fallen to around $1,250 at the time of writing, it was still an astounding blunder. The International Monetary Fund (IMF) decided in September 2009 to sell one-eights of its gold holdings. These were sold to central banksters around the world so as to provide funding for low income countries. Flip the calendar forward!

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According to the International Monetary Fund (IMF) and the World Gold Council, the largest officially reported gold holdings of various countries, as of January 2014, were as follows: USA Germany International Monetary Fund (IMF) Italy France China Switzerland Russia Japan Netherlands India Turkey European Central Bank Taiwan Portugal Venezuela Saudi Arabia United Kingdom

8,133 tons 3,387 2,814 2,451 2,435 1,054 1,040 1,015 765 612 557 508 502 423 383 368 323 310

You will note that two of the Eurozone countries which have serious debt problems are on this top-18 list; namely Italy and Portugal. Also, since I last recorded this list in December 2010, China has more than doubled its holdings and both Russia and Turkey have added significantly more. So, what's going on? 144

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This more than doubling by China suggests that it is making a serious attempt to place its reserves in gold rather than fiat paper currencies. It is interesting that an article by Ailen Sykora on January 17, 2014 in Kitco News suggested that the Chinese holdings may be much larger than those officially recorded since much additional purchasing has been done by the China Investment Fund, a sovereign wealth fund and, as such, would not appear in the “official holdings” of the People’s Bank of China. Indeed, Sykora suggested that total Chinese gold holdings may be as high as 2,710 tons which would rank the country as the world’s fourth largest holder. If Sykora’s assertions are correct, this would really mean that there has been more than a five-fold increase in China’s gold holdings in the short space of approximately three years. Now, that screams out that China does not trust fiat paper currencies and may be hedging its bets in light of its huge holdings of American debt; now estimated to be about $1.3 trillion in U.S. Government Treasuries; although it masochistically continues to accumulate more. That may be for appearances’ sake because China doesn’t want to shoot itself in its foot. But realistically, what’s a “mere” $1.3 trillion in treasuries compared to its $78.0 trillion in holdings of gold; based on $1,200 an ounce? It’s small change! A couple of years ago, Robert Zolnick, head of the World Bank, made a call for a “co-operative world monetary system” which would basically involve the U.S. Dollar, the Euro, the Yen and gold as a global reserve currency (“Breton Woods II”).

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Could a Universal Cryptocurrency Replace the World’s Fiat Currencies Over the Course of the Next Century? The United States, as the world’s largest economy is in a quagmire of debt. Japan as the world’s third largest economy is also struggling under a massive government debt burden. There are fears that China, as the world’s second largest economy, is hiding the huge internal debt problems of its provinces, municipalities and state run industries under a corrupt communist rug. The PIIGS on the peripheral of Europe still face horrendous challenges. It’s reaching the point where all the taxes raised by some countries will go towards paying interest on their debt; leaving nothing for social security, healthcare, armed forces etc., and leaving nothing to pay down the principal on the debt. In order to provide these basic government services, the countries will be forced to borrow more. It’s a spiralling debt crisis which will be very hard to escape from. Confidence is the “glue” that holds this shaky, debt ridden economic world of ours together but that confidence is waning as seen by the growing acceptance of gold as a way central banksters are using it to hedge their bets. But gold is not the perfect answer in a digital world and a digital economy. It’s cumbersome to transport in a fast-moving e-commerce society where transactions take place over the Internet in a matter of seconds.

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Could a World Virtual Cryptocurrency Based on Gold Be Emerging? Of course, rather than using physical gold, a virtual cryptocurrency based on gold presents itself as an interesting possibility. Such a cryptocurrency could be converted into gold and vice versa. It’s happened in the past to paper currencies. All you have to do is roll the clock back less than 100 years to a world where paper currencies were convertible into gold on demand. Fast-forward to today, and there are reports that the British Royal Mint is involved in a plan to mint a limited edition of physical gold coins based on Bitcoin. (I assume with the encryption enclosed on a microchip.) What is even more intriguing is that the jurisdiction involved would be a tiny 3-mile long island called Aldernay which is located in the English Channel off the coast of France. What is even more interesting is that the island belongs to neither the U.K. nor to France but is a feudal property owned by the Duke, who just happens to be Her Royal Highness, Queen Elizabeth! A gold-backed cryptocurrency overcomes one of the main objections to returning to a gold standard and that is that there is insufficient gold around. This could be overcome with cryptocurrency units (like bitcoins) which can be subdivided into tiny units. If those “tiny” units get too high in value, they can be subdivided again, and again and again but you can always convert them back into gold even if it is only for a few tiny grains.

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The Problem with a Cryptocurrency Based on Gold There are some fundamental problems with using a cryptocurrency, like Bitcoin, based on gold. The first, is that if a cryptocurrency is based on gold, the gold has to be stored somewhere. As such, it is exposed to seizure by government regulators, tin pot dictators or any other hostile party. This is in contrast to bitcoins which can exist secretly and anonymously outside of any jurisdictional boundaries. The second, is that there are two values involved. There is the price of gold itself which constantly fluctuates relative to a fiat currency such as the U.S. Dollar. There is also the price of bitcoins which fluctuate on their own. Of course, if the value of the bitcoins drops below the value of the gold, an owner could simply melt down the coin and sell it for its value in gold. Conversely, if the value of the encrypted currency greatly exceeds the value of gold, the price of gold would likely come under pressure as gold traders working outside of the realm of cryptocurrencies dump their gold holdings. So, in either event the price of gold would come under pressure and could collapse. It is hard to conceive of a currency which has two values and for that reason, I question the survivability of any cryptocurrency based on a physical commodity such as gold, silver, platinum, oil, etc. On the other hand, physical currencies based on metals could provide an interesting alternative to fiat paper currencies. Some commodities would not be suitable. For example, I can’t see myself walking into my local convenience store and

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pouring oil from my “oil wallet” into a measuring cup in order to buy a bag of chips and a can of pop.

Could a New World Digital Cryptocurrency Emerge that is Not Based on a Commodity Such as Gold? Even if a new cryptocurrency is not backed by physical gold or another commodity, it’s tantalizing to think that it might emerge as a virtual world currency during the course of the next century. Bitcoin has certainly made a strong start in this direction but whether it can survive the upcoming regulatory maelstrom is another question. In addition, Bitcoin would have to achieve widespread acceptance among the peoples of all nations. That’s a tall order as anyone who has attended a session in the United Nations will be able to confirm. Maybe another world cryptocurrency will emerge which could be beatified by the governments of the major economic powers. Unfortunately, this may only happen after the fiat currencies of the world collapse under mountains of national debt and that could be a very, very messy affair...so fasten your digital seatbelts!

Back to the Beginning of Our Story When you got off the Virgin Galactic space ship and were greeted by all those bald headed, Coke/Pepsi bottle bespectacled nerds, you thought you saw someone in the background who appeared quite different. He was 149

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sporting a well-trimmed, pointy white beard and long wavy white hair that looked as if it was long overdue a haircut. He was wearing a Virgin Galactic tee-shirt. He sported a smug smile on his face. It suddenly struck you. Could this be Sir Richard Branson? But, then...maybe you were dreaming...or maybe you weren’t!

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